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COPYRIGHT DEPOSIT. 



BUSINESS LAW 



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THE MACMILLAN COMPANY 

NEW YORK • BOSTON ■ CHICAGO • DALLAS 
ATLANTA • SAN FRANCISCO 

MACMILLAN & CO., Limited 

LONDON • BOMBAY • CALCUTTA 
MELBOURNE 

THE MACMILLAN CO. OF CANADA, Ltd. 

TORONTO 



BUSINESS LAW 

An Elementary Treatise 



BY 



ALFRED W. BAYS 

PROFESSOR OF COMMERCIAL LAW, NORTHWESTERN UNIVERSITY 

SCHOOL OF COMMERCE; AUTHOR OF "CASE BOOK 

OF COMMERCIAL LAW" AND "AMERICAN 

COMMERCIAL LAW SERIB8" 



Nefo gorfe 

THE MACMILLAN COMPANY 

1919 

All rights reserved 



333 



Copyright, 1919, 
By ALFRED W. BAYS. 



Set up and electrotyped. Published September, 1919. 



OCi 20 19 i 9 



Norinooto press 

J. S. Cushing Co. — Berwick & Smith Co. 

Norwood, Mass., U.S.A. 



©CI.A536256 



PREFACE 

These pages are intended for use by students in 
schools and for readers in general who desire a brief 
exposition of the underlying principles of the law gov- 
erning business transactions. The author has deemed 
it essential to make the statement as plain as possible 
and to resist the temptation to elaborate. Physical 
limitations themselves in a book of this character require 
brevity. But the chief consideration is that the students 
for whom this book is intended cannot be expected to 
derive more than a general, and in some cases, unfor- 
tunately, a transient knowledge unless in later life in or 
out of school they pursue the study further. The au- 
thor is convinced that many books of this type are 
spoiled by wrongly directed ambition. What is said here 
should be of a basic or introductory nature. Accord- 
ingly, the first several chapters aim to present a general 
discussion culminating in a statement of the purpose 
of the study of "business law." For the same reason 
more space has been given to the fundamental subject 
of contracts than to any other. 

After much consideration, it has been decided not to 
include forms. Several reasons have induced to this 
conclusion. The chief purpose of putting forms in a 
book of this character is to acquaint the student with 
their appearance and phraseology. But when it is 
remembered that the students may purchase from any 



VI PREFACE 

stationer blank forms prepared for the needs of the 
particular jurisdiction, it seems that that fact furnishes 
the suggestion. It is therefore recommended that the 
student procure in connection with this book several 
blank forms for use at the appropriate place. The 
following are suggested : a bill of sale ; a stock certificate ; 
a warranty deed; a lease; a trust deed or mortgage. 
Bills of exchange, promissory notes, and checks are 
illustrated in the text. 

Questions and problems follow each chapter, but the 
teacher will find it profitable to frame many others from 
the text in addition to those given. 

Alfred W. Bays. 

Northwestern University, Evanston, 
August, 19 19 



CONTENTS 



CHAPTER 
I 


PART I. INTRODUCTORY 
Law Defined , 


PAOE 
I 


II 


The Branches of Municipal Law 


6 


in 


The American System of Government 


ii 


IV 


The Sources and Forms of Law 


. 16 


V 


Courts and Commissions 


22 


VI 


Commercial Law and Its Study 


. 27 



PART n. GENERAL PRINCIPLES OF THE 
LAW OF CONTRACT 

VII What is a Contract 31 

VTII Formation of Contracts: (i) Parties . 34 
IX Formation of Contracts: (2) Offer and 

Acceptance 41 

X Formation of Contracts: (2) Offer and 
Acceptance (Continued) — Validity of 

Assent 50 

XI Formation of Contract : (3) Consideration 59 

XII Formation of Contract: (4) Legality . 68 

XIII Form and Expression of a Contract . . 74 

XIV Transfer of Contract 87 

XV Discharge of Contracts .... 91 

vii 



viii CONTENTS 

PART III, PRINCIPAL AND AGENT 

CHAPTER PAGE 

XVI Definitions and Explanations . . . 99 
XVII Agent's Authority in Contract . . . 105 
XVIII Ratification: Undisclosed Agency . .112 
XIX Principal's Liability for the Agent's or 

Servant's Torts 115 

XX Agent's or Servant's Liability to Third 

Persons 119 

XXI Mutual Rights and Obligations of Prin- 
cipals, Agents and Servants . . .,123 
XXII Revocation and Termination of Agency . 126 



PART IV. SALES OF GOODS 

XXIII Definitions and Explanations !'" . . 129 

XXIV Warranties in Sales ... . .135 
XXV Transfer of Ownership . . . .142 

XXVI Sales by Transfer of Document of Title 147 

XXVII Ownership and Rights of Third Persons 150 

XXVIII Effect of Acceptance 153 

XXIX Remedies of the Parties . . , .156 



PART V. NEGOTIABLE PAPER 

XXX Forms of Negotiable Paper . . .. 158 

XXXI Requisites of Negotiable Paper . .167 

XXXII Negotiation of Negotiable Paper . .178 

XXXIII Rights of Transferee . . ., . .182 

XXXIV Liability of Parties 194 



CONTENTS IX 

CHAPTER PAGE 

XXXV Procedure to Charge Parties Secondarily 

Liable ....... 202 

XXXVI Discharge of Negotiable Paper. . .212 



PART VI. BUSINESS ASSOCIATIONS 

XXXVII Partnerships — Their Nature and For- 
mation 215 

XXXVIII Partnerships {Continued) — Rights of Part- 
ners Among Themselves . . .226 
XXXIX Partnerships {Continued) — Rights of Third 

Persons 229 

XL Partnerships {Continued) — Remedies of 

Creditors 235 

XLI Partnerships {Continued) — Dissolution of 

Partnerships . . . ., . .238 

XLII Corporations Defined 241 

XLIII Corporations {Continued) — Organization . 248 
XLIV Corporations {Continued) — The Powers of 

a Corporation . . , . . . 253 
XLV Corporate Shares .... ... 259 

PART VIL LAW OF PROPERTY 

XL VI General Description 264 

XL VII Estates in Land 269 

XL VIII The Freehold Estates .... 270 

XLIX The Estates Less Than Freehold . . 277 

L Mortgages . . . . . . . .281 

LI Transfer of Title by Deed . . .284 

LII Rules of Descent — Wills . . . .286 



BUSINESS LAW 

PART I 
INTRODUCTORY 

CHAPTER I 

LAW DEFINED 

THE NATURE OF LAW 

The units of political power. The people of the world, 
as we know, have no common government. They are 
arranged, for governmental purposes, in groups of vari- 
ous sizes and degrees of strength, which, by our hypoth- 
esis, have political independence. In the progress of 
our civilization, some of them may break up into further 
units, some of them may coalesce and merge, but so 
long as it is true that there is no common government 
over all people, organized society necessarily consists in 
a collection of independent groups. 

These units of political power are known as nations, 
governments, states or sovereignties. The two last 
words seem technically preferable, for the word nation 
is frequently used to denote a people of ethnic unity, 
though perhaps not of political independence as such 
unity; and the word government may properly be 
employed to designate the government of a dependency 



2 BUSINESS LAW 

or subdivision of sovereignty. And yet usage justifies 
either l nation ' or ■ government ' as words to describe 
independent political powers ; and no harm is done if we 
remember that the words may be used in the other sense 
just described. But by 'state' or 'sovereignty' we 
always in political science mean a political power without 
a superior, a body politic owing no allegiance. In this 
sense, the United States is a state or sovereignty and 
the so-called ' states ' of the union are subsidiary gov- 
ernments which must deal with other sovereignties 
through the sovereign United States. 

Sovereignties or states exist and maintain order by 
law. It is apparent that a group of people, who desire 
(or whose leaders desire for them) to form a social organ- 
ization of stability which can have not only strength 
to survive against external attack, but also internal 
peace and order, will find it immediately necessary to 
establish authority and to issue rules which all within 
the group must obey, calculated to produce harmony 
of action, cohesion of members, internal peace and the 
strength of union. That by which such authority is 
established and maintained is known as national law, 
or, more usually, municipal law. What strictures may 
be imposed by the people of an independent group upon 
their representatives or upon the power of the central 
authority, does not detract from its character as a 
sovereignty as that term is used to denote interna- 
tional independence. Thus our own federal govern- 
ment cannot enact laws on certain subjects, but that is 
because the people of the United States have willed it so. 
The sovereignty of the United States among the nations 
of the world is not thereby affected. As a political 



LAW DEFINED 3 

power it stands upon a strong foundation of popular 
support, and is enabled to assert its sovereignty against 
any attack. 

It is also apparent that sovereignties in their com- 
munications with each other, in their common needs 
and in their mutual recognition of things right and 
just, would feel the need of establishing common rules, 
of making agreements and upholding common customs. 
Such internationally recognized rules, customs and agree- 
ments are known as international law or the law of 
nations. Thus, national or municipal law and inter- 
national law, being commandments emanating from 
sovereignty, constitute what we know as political law, 
and are its two great branches. 

The character of international law. It has been seen 
that international law is that law commonly accepted 
among sovereignties for the regulation of international 
affairs. It will appear that such law exists merely by 
common consent among nations and that there is no 
power superior to them by which it can be prescribed 
or by which it can be enforced. In this respect it differs 
basically from the law of a sovereignty. It is for this 
reason that sovereignties may differ upon questions of 
international law, and a nation may feel bold to dis- 
regard it. Nevertheless, in its main conclusions, it 
is fairly well established, it progresses with civilization 
and is generally obeyed. Its infraction leads to protest, 
demand for indemnity and war. 

International law is said to be express when it is put 
in the form of treaties and in the form of agreements 
and codes adopted in convention. It is said to be tacit 
when agreed upon by common observation of customs. 



4 BUSINESS LAW 

The character of municipal law. It is municipal 
law with which the individual is generally concerned, 
and which we shall consider in this book. Municipal 
law is the law by which a sovereignty organizes itself, 
regulates its affairs, establishes harmony of action and 
maintains peace and good order. There is a power to 
prescribe it and a power to enforce it. In less civilized 
states, such power is often arbitrarily expressed and un- 
evenly applied ; but with more enlightenment come 
laws of permanence, uniformity and justice. 

THE DEVELOPMENT OF LAW 

Law must not be looked upon as a perfect system of 
rules given to us by a higher power. It is always in 
development. It deserves respect and demands obe- 
dience as the expression of that which is necessary for 
order and security. In a crude society, the law is 
crude, often brutal ; in a higher order, it expresses the 
degree of the civilization. It is often a compromise, 
not only between good and evil, but between opposing 
views equally sincere. The layman sometimes thinks 
of the law as merely that which forbids wrongdoing; 
but a great part of our law is nothing more than rules 
of action in business life, usually suggested by experi- 
ence, by which to guide and interpret the manifesta- 
tions of the business world. 

Questions and Problems 

(1) Define, as used in international law, the word * sov- 
ereignty.' What is the other word which contains the same idea? 
Is the State of New York a sovereignty within this definition? 
Is the Dominion of Canada ? Name some sovereignties- 



LAW DEFINED 5 

(2) What is international law? How does it develop? How 
is it enforced? What two kinds of international law? Define 
each. 

(3) What is municipal law? Why is it always in process of 
development ? 



CHAPTER II 
THE BRANCHES OF MUNICIPAL LAW 

LAW CLASSIFIED ACCORDING TO ITS OBJECTS 

In general. The object of municipal law is to create a 
compact state to serve the ends of political power as 
conceived by the people or their leaders or representa- 
tives. Our Declaration of Independence contains a 
statement of the ends of government according to the 
ideas of our forefathers. " To secure these rights, 
governments are created among men deriving their 
just powers from the consent of the governed." But 
how shall this be accomplished ? It is necessary to es- 
tablish the form of government, to set forth its powers, 
to define the rights of individuals as between them- 
selves, and as toward the state. A multitude of laws 
must be put in force, changed, repealed and added to 
from time to time as new needs arise. These laws fit 
into the great structure of law to serve its grand aim. 
But in themselves they must accomplish more im- 
mediate ends. Let us inquire as to those more im- 
mediate purposes ; in other words, classify law accord- 
ing to its various objects. A classification on this basis 
is the true classification to denote the character of law. 

The classification, as made here, is not a perfect 
division of law into separate branches; nor can it be. 

6 



THE BRANCHES OF MUNICIPAL LAW J 

Particular laws seek various objects; the branches 
intertwine. Thus the law of Property may involve 
Constitutional Law, Criminal Law, the Law of Torts, 
of Contracts and all the other branches. 

Constitutional law. This is the law whose object 
is to establish the government and assert fundamental 
political rights. In the United States we have a written 
constitution which is our basic law, and all enactments 
must be in accord therewith. It is described in the next 
chapter. But many countries do not have written 
constitutions. 

Administrative law. The law by which the govern- 
ment operates, such as revenue laws, laws establishing 
courts of justice, laws creating political divisions. 

Criminal law. This is the law having for its object 
the maintenance of the peace and good order of the 
state ; the law by which certain acts or omissions to act 
are declared to be of such serious damage to the state 
in its collective capacity that the state will, in its own 
name, institute legal proceedings and inflict punishment. 

The breach of the criminal law is called a crime. A 
crime may be defined as an act, or an omission to act, 
of such serious tendencies to the damage of the state in 
its collective capacity that the state will, in its own 
name, and for its own sake, take notice of the event and 
punish the actor for the purpose of warning him and 
others against like conduct in the future. It is the 
injury to the state which makes the conduct a crime. If 
an individual is also injured he may have redress for 
his injuries under the law oi torts; but it is the injury 
to the state, the public wrong, which makes the act a 
crime. Many injuries which are hurtful to individuals 



8 BUSINESS LAW 

and which therefore constitute grounds for suits for 
damages are not criminal in character, because the 
injury is not of such a nature that it tends directly and 
materially to disturb the peace and good order of society 
and may therefore be safely left for correction to the 
suit of the individual for his damages. Such, for instance, 
is injury by mere negligence, as where I lend my book to 
a friend and he carelessly loses it. Here there is no 
crime ; but if he steals my book, a crime is committed ; 
the state may punish and I may have my suit for dam- 
ages. In this case he commits a crime, or wrong to the 
state, tending to disrupt its peace and the public se- 
curity; and he also commits a tort, or private wrong 
to an individual. Many crimes arise out of acts which 
are not wrongs to any particular individuals, as in 
cases of exceeding speed limits upon highways, having 
counterfeit models in one's possession, and the like; 
but usually a crime does involve also a wrong to an in- 
dividual. 

Examples of crimes are : murder, arson, burglary, 
robbery, larceny, assault and battery, getting money 
under false pretenses and disturbing the peace. 

The law of torts. The law imposes upon each in- 
dividual duties toward other individuals as individuals. 
Membership in society brings curtailment of natural 
liberty. If one person infringes upon the rights of 
another as defined by the general law, the injury is 
called a tort. The act may, as we have seen, be also 
a crime; and it may not be. Whether it is or not is 
immaterial in the definition of the tort. A tort may be 
defined as a wrong committed by one individual toward 
another, consisting in the violation of the general law 



THE BRANCHES OF MUNICIPAL LAW 9 

by which the rights of individuals as such are established. 
In a tort we must have injury to an individual. No 
matter, for instance, how careless a person is, if no one 
is injured by that carelessness, no tort has been com- 
mitted, for no one has any right to complain that he 
is damaged. 

Various torts are : negligence, slander and libel, 
trespass to property, assault and battery, improper 
acts of dominion over another's goods (conversion), 
fraud and conspiracy. 

The law of contracts. This is the law under which 
obligations may be assumed by agreement. It is con- 
sidered fully hereafter. 

The law of property. This is that branch of the law 
which regulates the ownership of private property. It 
determines the theory of ownership, covers one's duties 
respecting the use of his property, defines the manner of 
sale or gift, establishes the rules of descent upon the 
death of the owner. 

The law of persons concerns the status of persons of 
exceptional classes, as those under age and insane 
persons. 

The law of delegation and representation. This is 
the law under which one (called a principal or master) 
may delegate to another (called an agent or servant) the 
power to act in his name and for him. It constitutes 
one of our subjects of extended discussion hereafter. 

The law of business associations. Corporations and 
partnerships are the most important headings here. 
These are considered fully in later chapters. 

The law of pleading and procedure. This is the law 
by which a right arising under some other heading of 



IO BUSINESS LAW 

law is enforced in and carried through the courts. It 
is sometimes called adjective law ; and the law for whose 
enforcement it is provided is called substantive law. 

Other headings might be mentioned, but the most 
important general branches are above enumerated. 

LAW CLASSIFIED ACCORDING TO SUBJECT MATTER IN- 
VOLVED 

The law is often treated in textbooks and digests 
under headings of a narrower and more specific nature 
than those we have considered, as, the law of negotiable 
paper, the law of carriers, the law of bankruptcy, etc. 
These are either further subdivisions of the subjects 
above enumerated or subjects upon which to attain its 
more general ends the law operates. In our discussion 
at length hereafter we shall have occasion to consider 
some of these specific subjects. 

Questions and Problems 

(4) What is the most satisfactory classification of law ? Why ? 

(5) What is constitutional law ? 

(6) What is the object of administrative law ? 

(7) What is the object of the criminal law ? 

(8) Define a crime. 

(9) Is a crime necessarily injurious to an individual? 

(10) What is an act called which results in injury to an in- 
dividual when considered from that individual's standpoint? 
Is such act also a crime? 

(11) Name some crimes. 

(12) Name some torts. 

(13) What is comprehended in: the law of persons, the law 
of delegation and representation, the law of business associations? 

(14) What is adjective law ? Its object? 

(15) In what other way is the law often divided? 



CHAPTER III 

THE AMERICAN SYSTEM OF GOVERNMENT 

Having defined law and noted its various branches, 
we are in a position to take up the subject of Form and 
Expression of law. But it seems advisable as an in- 
troduction to that subject, to consider briefly the form 
or system of American government. This chapter is 
devoted to that subject. Only the barest outline will be 
attempted, as the subject is more properly one to be 
developed in a text on civil government or history. 

HISTORICAL 

The American colonies at the time of the Revolution. 

When the war was in progress, the American colonies were 
strung along the Atlantic Coast, united in bitter ex- 
perience and in tradition and language, but several in 
political independence. Events were rapidly disclosing 
the weakness of their condition. But the people were 
suspicious of a centralized power and tenacious of local 
rule. They had just emerged from the control of tyran- 
nical government and were apprehensive of the tend- 
encies of a centralized power. Nevertheless, it was 
apparent that some sort of cooperation and common 
defense must be devised. 

The Articles of Confederation. To meet the need 
thus felt, the colonies sent delegates to Philadelphia, 



12 BUSINESS LAW 

who on July 9, 1778, adopted "Articles of Confedera- 
tion and Perpetual Union," reciting that each state 
retained its " sovereignty, freedom and independence," 
but that the states entered into a " firm league of friend- 
ship with each other, for their common defense, the 
security of their liberties, and their mutual and general 
welfare," setting forth the right of the people of any 
state to travel into and out of any other and to enjoy 
the commercial privileges of the citizens of any state 
into which they might come or send their commerce; 
creating a general Congress whose powers and limita- 
tions were set forth at length. 

Weakness of the confederacy. The confederacy 
failed because there was no centralization of power, no 
way by which any common need could be met with 
executive force. It was soon evident that a stronger 
alliance or indeed a merger into one government out of 
the many would have to be devised. It was urged that 
one sovereignty should replace the thirteen. Indeed, acts 
of sovereignty by the congress were already beginning. 

The adoption of the federal Constitution. To attempt 
to devise some better method of association than had 
been accomplished under the confederacy, the states 
sent delegates to convention, who after much considera- 
tion, debate and compromise adopted on September 
17, 1787, the federal Constitution, which was ratified 
to take effect on March 4, 1789, the general nature of 
which we will discuss in another connection. 

THE DUAL SYSTEM OF AMERICAN GOVERNMENT 

The federal government. — Its nature. Under the 
federal Constitution, the United States government is 



THE AMERICAN SYSTEM OF GOVERNMENT 13 

made a sovereign power, with full centralization and 
grant of power necessary to that end. That govern- 
ment was created by the then sovereign states by the 
adoption of the Constitution setting forth its powers. 
Whatever power the United States has must therefore 
be derived from that Constitution. The brief history 
which has been recited above is for the purpose of 
showing how our federal government is one of delegated 
power, the reserve of power being in the various states, 
who, having all power, met to grant away a portion of it. 
That delegated power under the Constitution is either 
express, that is, set forth in terms in the Constitution, 
or implied, that is, inferred as necessary, reasonable or 
convenient to carry into effect the express power. But 
therein, either from direct statement or by inference, 
must be found all federal power. 

The enumerated powers of the federal government. 
The specific powers of Congress are set forth in Article 
I, Section 8, of the Constitution, which is published as 
an Appendix to this book. The reader is referred to 
that portion of the Constitution to be read at this point ; 
and it would be well to read the entire document in 
connection with this chapter. 

The implied powers of the federal government. No 
better illustration of the inferred or implied powers of 
Congress can be found than the one contained in the 
early case of McCullough v. Maryland, decided in 
the United States Supreme Court. The question was 
whether the United States government could incorporate 
a national bank. The Constitution does not expressly 
give the government the power to establish a bank or 
to incorporate a company. The fiscal powers of the 



14 BUSINESS LAW 

government are, however, very full and extensive, with 
the right " to make all laws which shall be necessary 
and proper for carrying into execution the foregoing 
powers." Chief Justice Marshall decided that under 
the express fiscal powers and the right to pass all laws 
necessary and proper for carrying them into force, 
legislation establishing and incorporating a national 
bank was constitutional. From that time on, there 
has very fortunately been what may be termed " liberal 
construction " of the Constitution, as opposed to the 
construction demanded by the " strict constructionists." 

The powers of the states. As the United States is 
a government of delegated powers, and as the states, 
prior to that delegation of power, contained all power, 
it follows that the states possess all political power 
which they have not granted away. To find whether 
the federal government possesses any power, we must 
look to its Constitution to find it therein expressly or 
impliedly given. But to find whether the states have 
any power we look to see whether it has been taken 
away. Sovereignty has been taken away and so has 
the right to secede from the Union. So have many 
powers enumerated in the Constitution, including cer- 
tain rights to legislate upon questions of citizenship ; 
as well as those enumerated powers in Section 8 of 
Article i (although as to some of these the states may 
legislate until Congress has acted). But the great 
reserve of power as to commercial life, ownership of 
property and political status, is in the states. 

The state constitutions. Each state, for the estab- 
lishment of its own government, has adopted a con- 
stitution. What that state constitution contains is 



THE AMERICAN SYSTEM OF GOVERNMENT 15 

purely a question for the state itself, so long as it covers 
matter left to the state under the federal Constitution, 
and the state constitution may be amended at the pleas- 
ure of the state. While in force, however, all state 
legislation must be in conformity with the state constitu- 
tion, as well as not in conflict with the federal Constitu- 
tion. If a state statute is opposed to either, it is un- 
constitutional and void. 

Questions and Problems 

(16) What was the political condition of the colonies after 
the Revolution ? 

(17) What were the Articles of Confederation? When 
adopted ? Why did the confederation fail ? 

(18) When did the federal Constitution take effect ? 

(19) What is meant by saying that the federal government 
is one of delegated power ? 

(20) What was the case of McCullough v. Maryland? What 
principle of constitutional construction did it decide ? 

(21) What is the office of the state constitution? 



CHAPTER IV 
THE SOURCES AND FORMS OF LAW 

TWO FORMS OF EXPRESSION 

Law has two general forms of expression: (i) by 
the enactment of law-making bodies, called written law ; 
and (2) by the declaration of judges in their decisions 
construing and applying general customs and traditions, 
called unwritten law or common law. Each of these two 
forms of law requires discussion. 

ENACTED OR WRITTEN LAW 

The source of enacted or written law. There is, in 
every government, a " law giver." The law giver may 
be one man as in a tyranny, or, as is now the case in 
every country of importance, a body of men, as a Con- 
gress or a Parliament. Law promulgated by such a 
law-making body is called enacted law or written law. 

Why called written law. Manifestly there is but one 
sound and logical way by which a law-making body can 
pronounce and record its will and that is by reducing to 
writing the proposition decided upon. Because the 
permanent memorial of the will of the law-making body 
is in writing, the term " written law " is used to de- 
scribe it. 

The character of the operation of written law. Written 
or enacted law looks to the future and is in general 

16 



THE SOURCES AND FORMS OF LAW 1 7 

terms. This excludes special legislation designed to 
operate upon some particular fact, and refers to general 
law with which we are concerned. So qualified, written 
law sets forth a rule of action to govern future conduct. 

The forms of written law. Written law is expressed 
in (a) treaties; (b) constitutions, and (c) statutes. 

A treaty is a compact between sovereignties. 

Constitutions have already been described in the 
previous chapters. 

A statute is a law passed by the law-making body under 
the powers granted to it. In our government it must 
be constitutional, that is, in accord with the governing 
constitutions. Statutes are enacted by the federal 
government upon the subjects over which Congress has 
power under the Constitution. Such laws must not 
be opposed to the letter or intent of the federal Consti- 
tution. If so, they are called " unconstitutional " and 
are void and of no effect. The states enact laws upon 
the powers reserved to the states. Such laws are un- 
constitutional if contrary to either federal or state con- 
stitution. 

The word ordinance is popularly used to indicate the 
law of a municipality. It is enacted under the authority 
of the state of which the municipality is a subdivision. 
This word has a larger meaning also to indicate a charter 
or statute, as, the " ordinance of 1787." 

Codes. When the law upon any subject is drawn up 
in a concise and logical statutory form, rather than by 
additions and amendments from time to time made by 
succeeding legislatures in more or less fragmentary 
form, we call such enactment a code. A more ambi- 
tious attempt might be made to draft the bulk of the 



1 8 BUSINESS LAW 

law in the form of a code, but any subdivision so handled 
is properly termed a code. The two most famous codes 
of history are the Justinian Code and The Code Napo- 
leon. In England, there has been much recent codifica- 
tion on various subjects ; and in our own country, some 
of the states have attempted more or less codifica- 
tion. The matter of codification of particular branches 
of law has been assisted by the work of the Commis- 
sioners on Uniformity of Legislation hereafter de- 
scribed ; although the laws proposed by them are more 
generally referred to as " Uniform Laws." But it is 
generally true that American legislation is not in form 
of codification but rather of statutes enacted piece- 
meal from time to time on narrow subjects of law. 

Uniform laws. Inasmuch as the division of our 
government into states each with its great reservation 
of power to enact its own laws on commercial and local 
subjects results often in unfortunate changes in the 
state lines which are crossed and ignored by commerce, 
a very successful attempt has, of late years, been made 
to secure uniformity of legislation by the different 
states upon various subjects, especially those of decided 
commercial importance. This has been brought about 
by the appointment by the different states of Commis- 
sioners upon Uniformity of Legislation. These Com- 
missioners meet annually and from time to time draft 
proposed laws upon certain subjects which after having 
been fully considered and then adopted by them, are 
recommended to the various states for passage. Such 
proposed laws do not, of course, have the effect of law 
until enacted by the various states. Thus a so-called 
uniform law might be in effect in but a few states, or 



THE SOURCES AND FORMS OF LAW 19 

might not be adopted by any state. The most suc- 
cessful acts, having been widely adopted, are The 
Negotiable Instrument Law, the Sales Act, the Bills 
of Lading Act and the Warehouse Receipt Act. 

COMMON OR UNWRITTEN LAW 

The governing force of customs and traditions. It 

is clear that, especially in the early life of a government, 
there cannot be legislation or written law to govern 
every need. Cases will constantly arise wherein the 
decision must rest upon customs and upon common 
traditions of right and wrong. By applying these 
customs and conceptions of right to the cases as they 
come before them, the judges make them law. Common 
or unwritten law is therefore frequently called " judge- 
made law." 

Why called unwritten law. The law so made is 
called common law, or unwritten law, because it does 
not originate in a written form by enactment of the 
law-making body. It has been a favorite fiction among 
law writers and judges to speak of common law or un- 
written law as law whose origin is lost in the mists of 
antiquity, " whereof the memory of man runneth not 
to the contrary," as Blackstone says in famous language. 
But, as a matter of fact, common or unwritten law is 
simply judge-declared law, whose origins we may often 
trace and phases of which are indeed now, and must 
always be, in process of formation. 

Common or unwritten law always consists in general 
principles of justice and universally established customs. 
Judges always deprecate their power to make law. They 
insist they can only declare and apply that which is 



20 BUSINESS LAW 

already law, and that is, generally speaking, quite true. 
Our law-making bodies are exclusively the law-making 
powers, in so far as the right to enact a rule to govern 
future cases is concerned. If, for instance, we are to 
have an eight-hour law for women, only the legislature 
can enact it. But courts must necessarily apply prin- 
ciples of common justice and the rules of common cus- 
tom to cases in which there is no written law. Being 
so applied such principles and rules become declared 
law. In early English days, there was little written 
law. Coming on down the centuries, we find a greater 
tendency to formulate law in written statement by 
enactment. But all our law rests upon the great founda- 
tion of unwritten law. 

Where unwritten law is found. Calling common law 
unwritten law is likely to mislead. It is not unwritten 
in the sense that there is no written statement of it. 
As it was pronounced by the judges, it was written down 
by reporters, and the reports of decisions were eagerly 
read by the judges in their search for precedents. For 
precedents formed the law and there came to be a rule 
called stare decisis, " let the decision stand," meaning 
that what has been declared to be law in one case would 
be followed by the judges in other cases involving the 
same principle, for otherwise there would be no law, 
but everything would depend upon the particular judge's 
view. Yet it is also true that justice requires the 
over-rulings of many decisions where they are clearly 
fallacious or time creates new public opinion. Statutes 
may, of course, at any time change what has been the law. 

Written or statute law declares or supplements or 
modifies or abrogates the common law. 



THE SOURCES AND FORMS OF LAW 21 

Questions and Problems 

(22) What other name is given to enacted law ? Why ? 

(23) What three forms of enacted law are mentioned in the 
text? 

(24:) Define a constitution. What country has no written 
constitution ? Has the United States a written constitution ? 

(25) Why is the United States spoken of as a government of 
delegated power ? What word describes the nature of the states' 
power with reference to the national government ? 

(26) Enumerate some federal powers. 

(27) Do all of the states have written constitutions? What 
purpose is served thereby? 

(28) If an enactment is contrary to the Constitution, what do 
we say of it ? Who decides this ? 

(29) Define an ordinance in its commonly accepted meaning. 

(30) What is a code ? Is the law of our country in code form ? 

(31) What is meant by common law? Can judges "make 
law"? 

(32) What is the effect of a precedent? What is the rule of 
stare decisis ? 

(33) What is the relation of the statute law to common law? 



CHAPTER V 
COURTS AND COMMISSIONS 

JUDICIAL COURTS 

The functions of the courts. The courts are created 
to construe the law and apply it to the various cases 
as they arise. They state the common law, as we have 
seen, applying it to the varying circumstances as cases 
come before them. But they must also construe and 
apply the statutory law and constitutional provisions. 
If ; therefore, we wish to know what the law is on any 
particular subject, we must consult the statutes to find 
if anything is written there upon it, and whether we 
find it there or not, we must go to the reports to see 
what the judges have declared the law to be in case 
there is no statute, or how they have construed and 
applied a statute. 

Trial courts and courts of review. Courts may be 
classified as those of original jurisdiction in which suits 
are started and tried, and those of superior jurisdiction 
to which cases already tried in the lower court may be 
carried by a defeated party for purposes of review. A 
court of review does not try a case ; it does not hear 
any evidence. Its function is to determine whether the 
trial court erred in announcing and applying the law 
applicable to the facts of the case. If the upper court 
is convinced that manifest justice has been done it will 



COURTS AND COMMISSIONS 23 

affirm the decision of the lower court, and if not, it will 
reverse it, and in reversing it, may grant a new trial 
in the lower court. The vast majority of cases are not 
carried beyond the trial court, as no end is to be gained 
by going further unless the defeated party is not only 
convinced that he has not received justice, but also that 
the amount involved is large enough to warrant the 
further trouble and time. 

The federal judicial system. In our dual system of 
government we have the state courts and the federal 
courts with respective jurisdictions suggested by what 
we have heretofore said about our system of govern- 
ment. Let us briefly notice the framework of the 
federal judiciary. The United States is divided into 
judicial districts, a district usually being coterminous 
with a state, but in some states there are two or three 
districts. Thus in Illinois there are the Northern and 
Southern districts of the state of Illinois. In each dis- 
trict is a district federal court which constitutes the 
federal court of original jurisdiction. The United States 
is also divided into judicial circuits, each circuit com- 
prising a number of districts. In each circuit is a 
circuit court of appeals, to which appeals may be had 
from any district court in that circuit. The United 
States Supreme Court sits in Washington and is com- 
posed of nine justices. It is the highest court in the 
land and may review appealable cases from any part of 
the United States. 

The reports. The decisions of the higher courts are 
supported by opinions written by the judges, and these 
opinions are contained in bound volumes called Reports. 
In early days these reports went by the name of the 



24 BUSINESS LAW 

reporter, but now are called by the name of the legisla- 
tive jurisdiction, as " Illinois Reports " or " Federal 
Reports." A case in a report is cited thus: Wuller v. 
Chuse Grocery Co., 241 111. 398, meaning the case of 
Wuller against (versus) Chuse Grocery Co., reported 
in Volume 241 of Illinois Reports, beginning at page 
398. We have already noticed that it is in these Re- 
ports that we find the declaration and the application 
of the common law and the application and construc- 
tion of statutory and constitutional law. 

ADMINISTRATIVE BOARDS AND COMMISSIONS 

General statement. The description of the forma- 
tion, expression and enforcement of our law is not 
complete without a reference to the boards and com- 
missions which are charged with the administration of 
certian of our laws and which in fact have some power 
of a judicial nature. Tendency has been quite marked 
in recent years to create commissions for the adminis- 
tration of various laws. Practise before these bodies 
has some of the appearance of a trial before a regular 
judicial court; and they make rulings, decide ques- 
tions of fact and apply the law to those facts. Their 
decisions, however, are subject for the most part to 
review by the courts, especially in cases of lack of juris- 
diction and abuse of discretion. A reference to the most 
important of these boards or commissions will more 
thoroughly explain their nature. 

Interstate Commerce Commission. The United 
States Congress has established this commission to deal 
with the problems resulting from the natural monop- 
oly of railroads. It may investigate railroad manage- 



COURTS AND COMMISSIONS 25 

ment, consider the reasonableness of established rates 
and make reasonable rules to carry out its powers. Its 
rulings and its orders are subject to review by the courts. 
It may call witnesses and conduct hearings. 

The Federal Trade Commission. A recently created 
commission is that known as the Federal Trade Com- 
mission created by Congress. Its power is to inquire 
into unfair methods of competition of those dealing in 
interstate trade. It has the power to call witnesses 
and conduct hearings and make investigations and pro- 
pose legislation. But it has no final judicial power, as 
those affected may appeal to the courts for review of its 
orders. 

The Federal Reserve Board. This board is created in 
connection with the Federal Reserve Banking Act and 
for the purposes of administering that act effectively. 

State public utilities commissions. In some of the 
states, commissions have been given the power to in- 
vestigate the conduct of railroads, street railways, 
telephones, telegraphs and other public utilities with 
the object of bringing about better service. Their 
acts are subject to review by the courts. 

Industrial boards. Boards have been established in 
many states for the purpose of correcting evils of factory 
and other industrial conditions, awarding compensation 
to injured employees, etc. 

Questions and Problems 

(34) What is the use of a court? 

(35) Why is it necessary to see what the court has decided 
to thoroughly understand statutory law ? 

(36) What two classes of courts are there with respect to 
the trial and review of cases ? 



26 BUSINESS LAW 

(37) Name the kinds and purposes of the various federal 
courts. 

(38) What are the judicial reports? 

(39) How are reported cases referred to? 

(40) What are the uses of administrative boards or commis- 
sions? Are their rulings subject to review? Name some of 
them. 



CHAPTER VI 
COMMERCIAL LAW AND ITS STUDY 

What is commercial law. Having now studied the 
general nature and the sources of law, let us inquire, 
before going further, what we mean by the words " com- 
mercial law " or " business law." Manifestly all law 
does more or less closely affect business. But we may 
choose various topics of the law with which men in busi- 
ness are directly concerned — the laws which govern 
their activities from day to day — and call the collec- 
tion business or commercial law. All writers upon the 
subject would not agree upon all of the subject matter 
to be covered in a book of this sort ; but upon some topics 
all would agree, and it is doubtful if any of the subjects 
covered in this elementary treatise could be omitted 
from any book on business law ; except that the subject 
of Property, included herein, is sometimes omitted. 

Our most important, our basic subject, is that of The 
General Principles of Contract Law. To a thorough 
knowledge of this subject will be credited a better com- 
prehension of the subjects which come after, some of 
which are in fact but narrower branches of the law of 
contract. 

What may be gained by a study of business law. 
Erroneous conceptions of the value of a study of busi- 
ness law are frequently met with among law students. 

27 



28 BUSINESS LAW 

It is very important to have a proper understanding 
of the results which we may expect to gain. The law 
is a subject to which the wisest man may devote a life- 
time of study without exhausting its possibilities, not 
only because of its constant development, but also be- 
cause of the many branches and limitless applications 
of the subject. What then may we do in a short 
course or the reading of a small book? We can only 
scratch the surface; or, to adopt a better metaphor, 
we can only get a bird's-eye view of the great territory 
and note the general direction of some of its main high- 
ways. In what ways will that be helpful? Let us 
see if we cannot at least partially answer that question. 
A study of business law helpful in practical ways. 
Anyone who would study business law in the way it 
must be presented in a short course, or in fact in any 
way short of making a professional lawyer of himself, 
and expect thereby to be able to dispense with legal 
advice and assistance would truly justify the old adage 
that ' he who is his own lawyer has a fool for a client.' 
Nevertheless there are many highly practical advantages 
to be gained which one may make use of in his daily 
work. There are many fundamental principles that 
are so well imbedded that one may learn them and act 
upon them with assurance that they will not change. 
For example, any business man, on being presented with 
a promissory note, ought to be able to say at once 
(i) whether it is negotiable and (2) why it is of impor- 
tance to know whether it is negotiable or not. So 
every business man ought to know that a promise not 
based upon consideration is unenforceable, and he ought 
to be able to tell whether consideration is present or 



COMMERCIAL LAW AND ITS STUDY 29 

absent in any particular case. Scores of other examples 
might be given. Again the study of the law helps one 
in a practical manner because it broadens one's legal 
vision. It teaches one to know a legal problem when 
in his own life it presents itself. It puts him on guard 
when to seek legal advice and it makes him a more 
intelligent client. It need not be feared that a student 
of business law will suffer harm because he will try to 
act as his own lawyer. The subject properly presented 
should show him his own limitations rather than set 
him up in his own conceit. 

The law a cultural study. It has always been rec- 
ognized that a study of law is cultural in the highest 
sense. It is a study of human nature in its many mani- 
festations. The law is a study of the problems arising out 
of commerce among men, and their solution of them. 
Not until we have a problem or need do we have law. 
For instance, not until we have one person buying 
an article and being dissatisfied with it and bringing 
suit about it, do we have a judge declaring that a person 
who sells personal property under some conditions 
warrants its quality. In the cases which we study which 
declare or develop the law we see the contest of desires, 
and of different viewpoints. Out of the clash, law 
develops. It is for reasons such as these that a study 
of law broadens our outlook and is educational in a 
higher sense than that of being merely informational. 

It has likewise been generally recognized that a study 
of law trains one in the processes of logical thought. 
The law is based upon logic and human experience. It is 
not pure logic, for much law is that which has been sug- 
gested by human experience, which seems not always 



30 BUSINESS LAW 

strictly in accord with reason. Yet in this we have 
reason applied to human needs to produce a workable 
rule to guide conduct. 

Questions and Problems 

(41) What is meant by the phrase " commercial law " ? 

(42) Can one by a study of commercial law learn enough 
law to be " his own lawyer " ? Explain. 

(43) In what ways is a study of commercial law helpful? 



PART II 

THE GENERAL PRINCIPLES OF THE LAW OF 
CONTRACT 

CHAPTER VII 

WHAT IS A CONTRACT 

Legal obligations assumed by agreement. A large 
percentage of obligations existing in the business world 
are voluntarily assumed by agreement. We have seen 
that there are innumerable obligations imposed upon 
one by the general law, from whose operation he cannot 
escape. Far more important commercially and for the 
progress of society as a whole are those engagements into 
which men voluntarily enter to assume obligations 
toward particular parties with whom they have chosen 
to deal. That such engagements may be relied upon, the 
obligations which by their form they contemplate must 
be made enforceable by the law. Otherwise all commerce 
between men except that of the crudest barter would 
be left to the whim, fancy or good will of the individual. 
It is true that usually men do perform their business 
engagements without legal compulsion because they 
are honest and fair and because it is not good business 
practice to violate engagements. But a person with 
whom an engagement has been made cannot rely alone 
upon this probability and these motives. He must 

31 



32 BUSINESS LAW 

have the law behind the promise, so that he can safely 
plan his future conduct with the knowledge that he can 
enforce the agreement if need be. It is the law behind 
the world of credit which enables it to be the mighty 
thing it is in our modern life. 

Contract defined. A contract may be defined as 
an agreement between two or more persons for the 
breach of which damages may be recovered in a court 
of law. 

Two main ideas in contract. In our definition of 
contract we notice that we have the idea of agreement, 
resulting in legal obligation. An agreement may not 
contemplate an obligation ; or if it does, it may not be 
a legal obligation. An agreement may be merely pas- 
sive, as that Washington was our greatest president; 
or may contemplate an obligation of a purely social 
sort, as an agreement to take a pleasure journey. In 
neither case is there a contract. To be contractual, 
the obligation contemplated must be one which is 
regarded by men generally as having legal consequences 
— restricting one's future course of conduct ; by which 
he must part with some property, do some act or re- 
frain from doing some act. 

The elements in contract. To be contractual, an 
act must contain the following basic elements : (i) par- 
ties competent to contract ; (2) offer and acceptance ; 
(3) consideration (or in a type of contract not so im- 
portant in business law and in some respects becoming 
obsolete, a seal) ; (4) legality in its object and in the 
manner in which it is made. 

Kinds of contracts. Contracts are : 

bilateral (consisting in promise for promise) ; 



WHAT IS A CONTRACT 33 

unilateral (consisting in promise for act) ; 

executory (when bilateral) ; 

executory on one side (when unilateral) ; 

formal (when under seal) ; 

simple or by parol (when not under seal, whether 
oral, in writing or implied) ; 

express (when verbal, whether oral or in writing) ; 

written (when in writing) ; 

oral (when merely spoken, sometimes mistakenly 
called verbal) ; 

implied (when inferred from conduct). 

Questions and Problems 

(44) Why is it important to have a law of contracts? 

(45) Define a contract. 

(46) What two ideas are in contract? 

(47) Explain how an agreement may not be contractual. 

(48) What are the elements in contract ? 

(49) A, the owner of a newspaper, offers a prize to the person 
who will obtain the largest number of subscriptions in a certain 
period. B obtains this number. Is this contract bilateral or 
unilateral ? 

(50) A contracts with B that A will, for a certain price, sell 
B a horse at the end of the harvest season. Is this a bilateral 
contract? Is it executed or executory? Is it formal or simple? 
Is it express or implied? 

(51) A calls B and requests B to dig a ditch for him, saying 
nothing about pay. B promises to dig the ditch in accordance 
with A's directions and does so. After doing the work, B de- 
mands pay. What term describes the nature of A's promise 
to pay B ? 



CHAPTER VIII 
THE FORMATION OF CONTRACT : (i) PARTIES 

COMPETENT PARTIES ESSENTIAL 

Party defined. One who makes a contract is called 
a " party " thereto. At least two parties must exist 
in every contract. There may be more. Usually there 
are not more than two sides, although there are fre- 
quently several parties on one side. 

If one is not a maker of a contract, no matter how 
strongly benefited or affected by it, he is not a party 
to it, and, generally speaking, has neither rights nor 
obligations upon it. 

Who may be a party to contract. All normal persons 
of legal age are capable of making contracts. Those 
under age have a limited capacity. Those who have 
limited mental capacity are under contractual disability. 
Married women, by early law, were not capable of con- 
tract, though that disability has been removed. The 
capacity of a corporation is governed by its charter. 

MINORS AS PARTIES TO CONTRACTS 

Minors, or infants, defined. A minor or infant, in 
the law, is anyone who has not attained the age set 
by the law as that age to which one must come before 
he attains the fullness of his legal powers. At common 
law, this age was twenty-one for males and eighteen 

34 



THE FORMATION OF CONTRACT 35 

for females. These are also the usual ages prescribed 
by statute. The law in establishing such an age recog- 
nizes the fact that in the life of every individual we 
may roughly draw a line between a period of youth and 
a period of manhood and womanhood. In actual life 
we cannot draw this line sharply, but it is necessary 
for the law to have some definite rule to go by and this 
is accomplished by drawing the line somewhat arbi- 
trarily through a certain day in the life of every person. 
Some persons are more mature at eighteen than others 
at twenty-five, but obviously, we cannot take this into 
consideration as it would open up endless and unsatis- 
factory discussion in each individual case. 

The main purpose for drawing this line between 
infancy and adult life is to save the minor from the 
consequences of his own folly and his improvident 
contract, but here again the law has deemed it best, 
for the accomplishment of its purposes, not to inquire 
into each individual bargain to ascertain whether it is 
to the advantage or disadvantage of the minor, but to 
lay down general rules upon which the court may pro- 
ceed. We may state those general rules as follows : 

Power of minor to contract. A minor has the power 
to make a contract but it is voidable by him unless it 
is for necessaries as shown below. 

Example 1. A, a minor, agrees with B, an 
adult, to work for B a specified period at a 
specified sum. This is a good contract and, 
although A may at any time withdraw from 
it, B is bound until and unless A does with- 
draw. 

Must return benefits when avoiding. Any contract 
made by a minor (except his implied contracts to pay 



36 BUSINESS LAW 

for necessaries actually received) may be avoided by 
him, upon his returning unearned benefits received under 
the contract. If he affirmatively seeks the rescission, 
as a plaintiff, he must give back the benefits if he still 
has them, and some authorities hold that he may re- 
scind even if he cannot place the other party in statu 
quo. This would seem to be a wise rule if the contract 
was unfair, or he was substantially impoverished by 
the contract, but otherwise it would seem grossly in- 
equitable. If the infant is sued, he may always defend 
that he was a minor, giving back the benefits if he has 
them, but otherwise having his defense. 

Example 2. A, a minor, being away from 
home to attend college, gives dinners in his 
rooms to friends at night time, running up an 
account with B for fruits and candies. B sues 
him. A pleads his minority as a defense. It 
is a good defense and B loses the case, not- 
withstanding the benefits cannot be returned. 
If he could return them, he would be obliged 
to do so. If in this case the minor had sued 
to get back his money the better rule is he 
could not prevail because he could not return 
the benefits. 

Right to avoid lost by ratification. A contract 
which a minor may avoid becomes binding upon him 
if he ratifies it after he becomes of age. Ratification 
cannot take place under age. Ratification consists in 
expressly confirming after majority, a contract made 
during minority, or in continuing to enjoy its benefits. 

Example 3. A buys an automobile while he is 
a minor. After his majority he uses it for 
several months. He then tenders it back. 
Here he has ratified the purchase by use of the 
car for an unreasonable length of time after 
attaining majority and thereby becomes bound 



THE FORMATION OF CONTRACT 37 

to his bargain. If in this case he had destroyed 
or sold the car before arriving of age, the mere 
passage of time after he became of age would not 
ratify. He could disaffirm when sued. 

Liable for value of necessaries. A minor must pay 
the reasonable value of necessaries actually supplied 
him. If he could not so bind himself, he might be 
compelled to go in want. 

Necessary defined. A necessary in this connection 
may be defined as anything required by a minor for his 
physical well-being or for his common school educa- 
tion. Or we may more adequately describe a neces- 
sary as anything required by a minor as (1) food 
(2) lodging; (3) raiment; (4) health requirement 

(5) working tool (when earning his own living) 

(6) common school education. 

To be a necessary, the station of life of the particular 
minor is to be considered. This principle sometimes 
confuses the student into thinking that anything which 
is usual for a rich man's son may be classed as a neces- 
sary. But this is not true. To be a necessary, the 
thing obtained must come under the headings we have 
indicated above and the station of life is to be con- 
sidered in order to determine quantity or quality rather 
than kind. Mere luxuries are never necessaries. 

It is for the reasonable value of the necessary for which 
the minor is liable. An excessive price agreed to by him 
would not bind him. 

If a minor is already supplied or is being supplied 
with the thing in question, then what he obtains is 
not a necessary. Parties who deal with minors must 
decide at their peril whether he is supplied or is being 
supplied with the article in question. 



38 BUSINESS LAW 

Example 4. A, 18 years of age, is allowed 
to go away from home to attend a college, with 
money supplied by his father. He contracts 
for a room for one year ; after a few months, he 
abandons the room for other quarters, and the 
owner is unable to re-rent it for the balance of 
the year (Gregory v. Lee, 64 Conn. 407) ; he 
also runs up a large bill for clothes of an ex- 
travagant style and far beyond his reasonable 
needs (Nash v. Inman, (1908) 2 K. B. 1). He 
is sued by the owner of the room and by the 
merchant. He puts in the defense of his 
minority. He may be held for the reasonable 
value of the room for the time he occupied it. 
He cannot be held for the remainder of the 
term. He cannot be held for the clothes in so 
far as they are superfluous for his reasonable 
needs. 

Example 6. A, the minor son of a very 
rich man, buys an automobile upon credit and 
also joins a club. Both of these acts may be 
regarded as not unusual for one in his station 
of life, but they are mere luxuries, not neces- 
saries, and the minor may repudiate in both 
instances if he so desires. 



OTHER PERSONS UNDER DISABILITY AS PARTIES 

Insane persons. The power of an insane person to 
contract depends upon a number of questions : whether 
he has been legally declared insane ; whether, if that is 
not a fact, the other person knew of his insanity ; and 
the local statutory law. We may lay down as a general 
rule sufficient for our purposes here that an insane person 
who has been adjudged insane and who has been com- 
mitted or for whom a conservator has been appointed, 
has no power to contract ; that one who has not been 
judicially cared for may make voidable contracts, and 
may bind himself to pay for his necessaries; and that 
one who deals with an insane person knowing him to 



THE FORMATION OF CONTRACT 39 

be such (except to supply him with necessaries or render 
services required for his case) is guilty of fraud. 

Married women. A married woman by the common 
law could not contract. She had legal authority to 
bind her husband for her necessaries if he was not 
supplying her. By modern law, the power to contract 
freely has been bestowed upon her. 

Corporations. The capacity of a corporation to con- 
tract is considered under the title " Corporations." 



Questions and Problems 

(52) What is meant by the phrase " party to a contract "? 

(53) Who is the minor? What other word is used synony- 
mously? Why does the law draw a distinction between a period 
in life called infancy or minority and another period called ma- 
jority? 

(54) A, a minor, contracts with B, an adult, for the purchase 
of a horse by B from A. When the time comes for the consumma- 
tion of the bargain, B refuses to perform, and when sued, alleges 
A's minority as a defense. Is the defense good ? 

(55) A, a minor, purchases a bicycle upon credit. The mer- 
chant sues for the price. A alleges his minority as a defense. 
What must A do or show in order to prevail? 

(56) A, a minor, purchases a gun from B. After he becomes 
of age, he sells it to a friend. He is sued by B for the purchase 
price. He alleges that when he got the gun he was a minor. Is 
the defense good? Why? 

(57) P, at the request of D, a minor, paid D's board bill con- 
tracted previously by D while attending school. P now sues D 
for the amount of the board bill. Can he recover? 

(58) P, at the request of D, a minor, loans D $100. After- 
wards D spends the money for necessaries and consumes them. 
P sues D, and D pleads his minority as a bar. Is it a good de- 
fense ? 



40 BUSINESS LAW 

(59) Are the following articles necessaries (assuming the 
minor is not already supplied and that they are suitable for the 
station in life of the person involved) : 

(a) A horse (Rainwater v. Durham, 10 Amer. Dec. 637) ; 

(b) A watch (Peters v. Fleming, 6 M. & W. 42) ; 

(c) Jewelry (Ryder v. Wombell, 15 Ark. 137) ; 

id) A college education (Middlebury Coll. v. Chandler, 16 
Vt. 683) ; 

(e) Bicycle for boy at work, used to go and come from work? 

(60) A, a minor, buys an automobile with which to carry 
passengers for hire, thereby to earn his living. Is this a necessary ? 
(Zein v. Centaur Motor Co., 194 111. App. 509.) 

(61) What was the power of married woman to contract by 
common law ? By modern law ? 

(62) Can an insane person contract ? 



CHAPTER IX 

THE FORMATION OF CONTRACT : (2) THE OFFER 
AND ACCEPTANCE 

OFFER AND ACCEPTANCE NECESSARY 

A contract is an agreement. We must have in true 
contractual liability the consent of the parties concerned 
to all the terms. The consent is obtained by a pro- 
posal on one side accepted by the other. The pro- 
posal is called an offer; its author, the offeror; and the 
party to whom it is addressed, the offeree. The consent 
to the offer we call the acceptance, and the offeree then 
becomes the acceptor. If the offeree replies by a modi- 
fied or counter proposal, he then becomes the offeror 
and the original offeror becomes offeree. Such counter 
offer may be in turn rejected and the original terms 
again proposed or some compromise suggested. Finally 
the contract may result or the effort to agree may prove 
futile. 

The offer and the acceptance may either or both be 
express, either in written or spoken words, or implied 
from acts; except that in certain cases, as we shall see, 
the law requires writing. 

After a contract is made it is usually immaterial 
which party was offeror or offeree. But where the exist- 
ence of a contract is in question, it may be very im- 
portant to inquire which person is offeror and which 

41 



42 BUSINESS LAW 

offeree, as an offeror may always withdraw the offer up 
to the very moment of acceptance, but an acceptance 
cannot be withdrawn, for at the moment it is made, 
the contract becomes effective. Both parties are then 
bound. 

The following case illustrates the necessity that there 
be offer and acceptance in every contract. 

Example 6. A has a stubble field in which 
B has a stack of hay. A starts a fire in the 
stubble at a remote part of the field, which 
owing to freshening winds, threatens to destroy 
the stack. A, without B's knowledge, and in 
order to save the stack, removes it. He then 
sues for compensation for his labor. There is 
no contract and A cannot win. (Bartholomew 
v. Jackson, 20 Johns. N. Y. 28.) 

PROPOSITIONS WHICH DO NOT CONSTITUTE OFFERS 

Introductory statement. We have seen that an offer 
consists in a proposition made by one to another, but 
we must be careful to notice that all propositions do 
not constitute offers which by acceptance will result 
in contract. A reference to the various situations will 
make this clear. 

Acts done in mere kindness, according to prevailing 
standards of interpretation, are not of a contractual 
nature. 

Example 7. A's home being on fire, he 
requests B, a neighbor, to help him get out the 
furniture. B accedes. The act is not done with 
evident contractual intent. B's secret intent 
to make a claim would not avail as A would be 
entitled to attribute to B the intent usually man- 
ifested by parties in similar situations. 

Preliminary propositions made to induce offers, some- 
times called invitations to treat, must be carefully dis- 



THE FORMATION OF CONTRACT 43 

tinguished from offers. Here we often have very close 
and difficult cases to decide, but the distinction in 
principle is very clear. Merchants constantly send out 
circular letters or even individual letters stating that 
they have commodities on hand which they " offer " 
at prices quoted; they publish lists and catalogues, 
which they send out indiscriminately to possible cus- 
tomers; they advertise auction or bargain sales. In 
none of these cases could it justly be said that the 
merchant does not reserve his right to choose his cus- 
tomers when orders are sent in, to look up credit ratings, 
to advance prices without notice, and even not to hold 
advertised sales. In such cases, the phrase " subject 
to prior sale," or equivalent expression, is often put in, 
but this is unnecessary, although always advisable be- 
cause in any case it may save friction and, indeed, may 
prevent a law suit. 

Example 8. A has a mail order house and 
sends out catalogues describing articles and 
giving prices. B sends in an order. Here, A's 
proposition is merely preliminary. B is the 
offeror, and A may accept or not as he chooses. 

Example 9. In the same case, A sends out 
circular letters. Such letters are not offers. 
The replies ordering goods are the offers. 

Incomplete propositions. A proposition, even though 
intended to result in contract, cannot be a technical 
offer if it is in any respect incomplete as to terms. 
Terms, however, need not be expressed when it is clear 
by fair inference that they were meant to be implied. 

Example 10. A proposes to sell B his horse 
Tom, but he states no price. This proposi- 
tion is not complete enough to constitute an 
offer, as even if B accepted, the parties would 
still be unagreed as to price. 



44 BUSINESS LAW 

Example 11. A orders groceries from B say- 
ing nothing as to price. Here there is an offer 
as it is to be inferred that A intends to pay the 
usual or market price. 

Propositions not communicated. A proposition not 
communicated cannot be an offer. This lack of com- 
munication may consist in the fact that the party who 
claims to have accepted may have been ignorant of the 
offer when he did the act ; or it may consist in the fact 
that the offer, though perhaps framed, has never been 
given out or sent to the other party although he may 
have learned its terms before he made his attempted 
acceptance. 

Example 12. A offers a reward for infor- 
mation leading to the conviction of C, an ac- 
cused person. B furnishes the information 
not knowing of the offer. There is no con- 
tract in this case and B cannot recover. 

Example 13. A writes a letter to B and 
puts it on his desk, never delivering it. B sees 
it and clandestinely reads it and then attempts 
to accept it. As A's offer is incomplete, B 
cannot accept it. 

THE DURATION OF THE OFFER 

Introductory statement. An offer manifestly does 
not continue to endure for purposes of acceptance for- 
ever. When a person claims to have accepted an offer 
and so closed a contract, the offeror may claim that the 
offer is no longer open. There are various possibilities 
in fact to affect the answer. 

Right to withdraw offer before acceptance. We 
should notice at first that any offeror may withdraw his 
offer at any time even if he has promised to keep it 
open for a longer time. This is for the reason that if 



THE FORMATION OF CONTRACT 45 

both parties are not bound, one cannot be. If, how- 
ever, one makes an offer and then for a consideration 
received, promises to keep the offer open, he cannot 
withdraw as he has a contract to keep his offer open. 

Example 14. A writes to B, offering to sell 
his horse Tom at prices and terms stated, say- 
ing that he will give B two weeks in which to 
accept. The next day he writes to B saying 
that he has withdrawn the offer. He may do 
this and the offer is thereby terminated. If B 
had paid A (say) $10 for keeping the offer open, 
then A could not have withdrawn. 

Duration where time not expressed. In this case the 
offer remains open a reasonable length of time, and what 
is reasonable depends upon many considerations, as, 
the various dealings of the parties, the customs of the 
community, the nature of the subject matter. Thus, 
an offer to sell land might be held to stand open several 
days, but an offer to sell stock, whose value is subject 
to frequent change, would expire quickly. 

Termination of offer by refusal. The offeree's re- 
fusal will terminate the offer. For in such a case the 
offeror should be free to look elsewhere. 

Counter offer is refusal. Within the rule stated 
above a counter offer is looked upon as a refusal and the 
original offer is thereby terminated. 

Example 15. A writes B offering to sell B 
five car loads of lumber at terms stated giving 
B five days in which to accept. B answers within 
the five days, offering to take the lumber, adding 
that it must be " surfaced two sides and counter 
matched." A refuses. B then, still within the 
five days, writes that he will accept the original 
offer. A is not bound to accept, as A's original 
offer was discontinued by B's counter proposal. 
(Shaw v. Ingram Day Lumber Company, 152 
Ky. 329, 153 S. W. 431O 



46 BUSINESS LAW 



THE ACCEPTANCE 

The acceptance must be in terms of and during life 
of offer. In considering the offer we have already 
noticed this truth. Example 15 is a good illustration of 
the principle. 

Communication of acceptance. The acceptance may 
be by word or act, according to the mode of acceptance 
contemplated by the offer. There need not always be 
a communication of the acceptance at the time the 
acceptance is made, where the acceptance consists 
according to the contemplation of the parties in an act 
done. If the acceptance is to consist in a promise, it 
must, of course, be uttered and communicated to the 
offeror or his agent in that behalf. Mere mental de- 
termination is not enough. 

Example 16. A writes B, a carpenter, that 
B may make some benches for him to put in A's 
yard. B starts work, not replying to A's letter. 
When the work is done, B tenders it to A. A 
refuses to accept it. There is no contract and 
A cannot be held. 

Example 17. A offers a reward to anyone 
who will get the most subscriptions for A's news- 
paper within a certain time, and other rewards 
to all persons who will obtain at least fifty sub- 
scriptions. B obtains the highest number and 
C, D and E each gets fifty subscriptions. The 
acceptance is complete by the doing of the act. 

Example 18. A writes B that if B will ex- 
tend credit to C, A will pay if C does not. B 
receives the letter and on the faith thereof, 
sells C goods. The acceptance is complete 
by the act of selling the goods, but B must 
give A immediate notice that he has accepted 
A's offer. In this case the acceptance may be 
by act done, for the offer contemplated such a 
case, but it is a condition of A's liability that 
he be timely informed. 



THE FORMATION OF CONTRACT 47 

Communication of acceptance to agent of offeree ; 
acceptances by mail or telegraph. We shall see under 
the discussion of the law of principal and agent that any 
person may carry on his activities with others through 
other persons who are called his agents. The important 
thing is that the agent shall be authorized by his prin- 
cipal's act or word to take care of the matter in question. 
Clearly an agent may and very frequently in commercial 
life does have power by implication or express grant, 
to accept offers on behalf of his principal, and this 
may be true, of course, whether or not he made the 
offer. 

Where offers and acceptances are made by mail or 
telegraph, it becomes important to determine at what 
point the contract may be said to be complete. Is it 
upon the mailing or telegraphing of the acceptance 
or is it upon its receipt by the offeror ? It is well settled 
that if the offeree accepts through the medium suggested 
by the offeror, the contract is complete when that me- 
dium is used. Thus if A sends B a*n offer and notifies 
B to accept by mail, the contract is complete when B 
drops the letter in the post office, upon the theory that 
A has made the postal service his agency to receive 
his acceptance. The same is true where the advice is 
to use the telegraph. Suppose, however, nothing is 
said as to the medium of reply. From the authorities 
we are safe in saying that usually where an offeror uses 
the mail and says nothing about the manner of replying 
he impliedly suggests the mail as the agency to receive 
the answer; and if he uses the telegraph he impliedly 
suggests that agency. In such cases the contract is 
complete when the answer is mailed or telegraphed. 



48 BUSINESS LAW 

Thereafter the offeror's retraction is ineffective, and 
whether the answer reaches him or not is immaterial. 
But the acceptance may be made by any means of com- 
munication if it actually reaches the offeror within the 
time of the duration of the offer. 

Example 19. A writes B an offer asking for a 
reply by return mail. The contract is complete 
when the letter is dropped in the mail box, and 
it is immaterial whether the letter reaches A or 
is delayed. If in this case B should wire A his 
answer, the contract could be thus closed pro- 
vided the telegram would not only reach A 
but reach him within the time in which the 
offer is outstanding. 

Example 20. A telegraphs to B an offer, 
saying nothing as to mode of reply. B telegraphs 
his reply within a reasonable time. The accept- 
ance is complete when the telegram is given 
to the telegraph company and delay or loss is 
a risk assumed by A, not by B. (Ayer v. W. U. 
Tel. Co., 79 Me. 493.) 

Questions and Problems 

(63) Define offeror ; offeree. 

(64) How shall we determine, there being nothing said about 
compensation, whether an act was done as a mere favor, or for 
expected pay ? 

(65) A wrote B " Kindly advise me by wire if you can use 
1500 creosota barrels between now and January 1st, at 95 cents, 
delivered in car load lots." B answered, ordering the barrels. 
Is there a contract if for some reason A does not care to fill B's 
order? (Cherokee Tanning Extract Co. v. W. U. Tel. Co., 143 
N. C. 76.) 

(66) State Example 8. 

(67) State Examples 10 and n, showing the reason for the 
difference in the solution. 

(68) A, being very anxious for certain information, tells B 
that if C will bring him the information, he will pay C one hundred 
dollars. C, not knowing of A's promise to B, brings the infor- 



THE FORMATION OF CONTRACT 49 

mation to A. Later B tells C of the statement and C sues A. 
Can he recover the $100? 

(69) State Example 13. 

(70) Why may A in Example 14 withdraw his offer? 

(71) How long will an offer remain open for acceptance ? 

(72) State Example 15. 

(73) Explain Example 16. 

(74) Explain Example 17. 

(75) Explain Example 18. 

(76) A writes B making an offer, to which he asks B's ac- 
ceptance by return mail. B drops a letter in the box to go by 
return mail. The letter is lost in the mails. Is there a contract? 
Suppose B had answered by telegraph and the telegram had not 
been delivered by the telegraph company, would there have been 
a contract? If the telegram had actually reached the offeror 
when would the contract have been complete ? 



CHAPTER X 

THE FORMATION OF CONTRACT: (2) THE OFFER 
AND ACCEPTANCE (CONTINUED). VALIDITY OF 
ASSENT 

INTRODUCTORY STATEMENT 

We have learned what constitutes offer and what 
constitutes acceptance. But so far we have been deal- 
ing with situations in which we assume that the state- 
ments made on both sides express what each party de- 
sires and understands. Form and substance are in 
accord. Thus, A offers to sell B an automobile, and B 
accepts, all terms being agreed upon. This is a binding 
contract from all that appears. But we may find ex- 
trinsic circumstances which detract from the validity 
of the assent which seems to have been given. A may 
have defrauded B ; or A may mean one car and B an- 
other; or B's promise may have been extorted from 
him by force or threats ; or unknown to either of the 
parties the car may have been destroyed at the time the 
attempted bargain is made. 

These extrinsic circumstances may be of such char- 
acter as to absolutely prevent contract, or they may 
merely give the party imposed upon the right to with- 
draw if he chooses. In the first class of cases the con- 
tract is void, or, better, was never really made, and cannot 
be ratified, while in the second situation the contract 

So 



THE FORMATION OF CONTRACT 51 

is voidable, and may become binding by the ratifica- 
tion of the party entitled to avoid it. 

FRAUD PREVENTING CONTRACT 

One may appear to be a party to a contract which he 
never intended to make. I may by fraud be induced to 
sign my name to a promissory note, intending to sign a 
receipt. In that case it is not my note as my intention 
does not accompany my act. And my negligence in not 
reading the paper is immaterial when my act has been 
induced by fraud. This does not mean that a party will 
not be bound upon a contract which he signs without 
reading. He will be bound, unless fraudulent state- 
ments are made concerning its contents and he relies 
upon these statements. 

Example 21. A states that he is paying a 
hospital bill for X and asks X to sign a receipt 
for it. X does so, not reading it. The paper 
is in fact a note. X is not bound. 

MISTAKE PREVENTING CONTRACT 

A mutual mistake of fact, as to existence of subject 
matter, or identity of subject matter, will prevent a 
contract from being formed. 

Example 22. A offers to sell B a horse, 
giving a general description. B agrees to buy. 
A has in mind one horse and B, another, as can 
be shown. There is no contract. 

Example 23. A offers to sell a certain horse 
to B. B agrees. The horse is already dead, 
unknown to either. There is no contract. 

A mistake as to value or quality will not invalidate an 
agreement. 



52 BUSINESS LAW 

Example 24. A has an old book which he 
sells to B, a book dealer, for two dollars. The 
book is a rare copy and worth one thousand 
dollars, as both subsequently learn. A seeks 
to set aside the sale. He will be unsuccessful. 
The contract is valid. 



FRAUD IN INDUCEMENT OR CONSIDERATION 

Fraud in inducement or consideration defined. Fraud 
in the inducement or consideration is that sort of fraud 
whereby a person is prevailed upon to do an act because 
of the misstatements of another. When he does the 
act, he really intends to do that very act, but his in- 
tention is induced by the fraud practiced upon him by 
the other party to the contract, as to the importance or 
consequence thereof. 

Example 25. A induces B to buy mining 
stock and to give his promissory note for the 
price. A accomplishes this by telling B that 
the mine has a certain output. As a matter of 
fact it is not in operation at all. In this case, 
B's intention is to buy the stock and to sign the 
note, but the inducement is fraudulent. 

Elements in fraud. To constitute fraud, there must 
be (i) a statement of fact (2) made to be relied upon 
(3) with knowledge of its falsity or with careless dis- 
regard as to whether it is true or false and (4) relied 
on by the party to whom made (5) to his damage. 

Statement must be one of fact, not of opinion or 
prediction. One's opinion, though given in bad faith, 
cannot be made the basis of a charge of fraud. A little 
consideration will show why this must be so. Men 
who are trying to drive bargains are always extrava- 
gant in their assertions of value or worth. An auto- 
mobile salesman will call his car the best on the market ; 



THE FORMATION OF CONTRACT 53 

a real estate dealer will speak glowingly of the future 
of the property he seeks to sell. It is an old saying that 
a dealer will " puff his wares," and the law allows him 
to do so. We cannot base law suits upon the truth of 
these predictions or opinions. Every one ought to 
know their true value and discount them for what they 
are worth. A purchaser must be upon his guard. He 
stands at arm's length and must beware that he pro- 
tects his own interests. But if statements of fact are 
made, he must be .able to rely upon them. If one party 
cannot take the other party's statements of fact as 
true and contract in reference to those facts as stated, 
we should have such investigation and precaution 
required as would preclude all dispatch in making con- 
tracts. If one states a fact he should be held to it, 
but if he states an opinion it should be received as such. 

Example 26. A new tire company is being 
formed. Stock is offered at a great discount. 
The promoter asserts that in his opinion stock 
will be selling on the market at par within one 
year. A having faith in the promoter's state- 
ment buys the stock. The company fails. 
There is no fraud and A has no relief. 

Example 27. A desires to sell B a delivery 
truck. B is a grocer employing two delivery 
boys driving horses and wagons. A tells B 
that if B will buy the truck he can dispense 
with the services of one of the boys and that his 
business will increase fifty per cent. B finds 
that he cannot dispense with either boy and 
that his business does not increase, and there- 
fore he seeks to set aside the bargain. He can- 
not prevail. The assertions were mere trade 
talk. 

Silence as fraud. To remain silent about a fact, 
allowing the one party to remain ignorant of facts known 
to the other, is not fraud in the ordinary case. 



54 BUSINESS LAW 

Example 28. A wishes to buy B's land. 
A has learned that a street railway is pro- 
jected in the neighborhood, which will materi- 
ally increase the price of B's land. B does not 
know this and sells to A much cheaper than he 
would have done had he known the facts. The 
sale is valid. A's silence is not fraud. 

There are some cases, however, in which to remain 
silent is to accomplish a fraud. They are the cases in 
which the circumstances impose a duty upon one to 
speak. There are three sorts of circumstances in which 
this duty arises : 

(i) Where the facts known to one party are prac- 
tically unavailable to the other upon reasonable in- 
vestigation. 

(2) Where the parties stand in a relation of trust and 
confidence. 

(3) Where the nature of the contract is such that full 
disclosure is of its very essence, as in contracts of in- 
surance and suretyship. 

Example 29. A has cattle which are affected, 
to A's knowledge, with " Texas Fever," a 
disease not apparent upon reasonable inspec- 
tion. He offers the cattle to B at prevailing 
market prices. B buys. A's failure to disclose 
is fraud and B can rescind the sale or sue A for 
damages. (Grigsby v. Stapleton, 99 Mo. 423.) 

Example 30. A is B's agent to sell real 
estate. A offers to buy it himself. He has 
knowledge of facts which affect the value and 
which he knows to be unknown to B. He re- 
mains silent upon these facts and makes B a low 
price. B accepts. B can set the transaction 
aside as the relationship of confidence puts B 
off his guard. 

Relationships of this sort are those of attorney and 
client, physician and patient, parent and child, trustee 
and beneficiary, principal and agent. 



THE FORMATION OF CONTRACT 55 

Active concealment as fraud. If one conceals facts 
so that the other party will be prevented from dis- 
covering what research and inquiry might have shown, 
the concealment constitutes fraud. 

Example 31. A desires to sell B a mine. It 
has been worked and abandoned. He puts 
boards over old openings and covers them with 
dirt, and thus conceals the true character of the 
mine. A's conduct amounts to fraud. 

Results of fraud. Where there is fraud in the induce- 
ment, such as we have been discussing just above, the 
contract is not void, but avoidable at the instance of 
the defrauded party. He can have the transaction set 
aside, but in that case he must be willing to put the 
other party in statu quo by a return of the considera- 
tion. Or he can sue for damages. But as the transac- 
tion is voidable, not void, he must act in timely, posi- 
tive fashion upon discovering the fraud ; otherwise he 
will be considered as having ratified the contract, and 
from that time on it will be as absolutely binding upon 
him as though it had been so in its inception. Or he 
can show by his statements that he intends to stand by 
the bargain. That is called express ratification. 

DURESS 

Duress defined. Duress in the law means unlawful 
compulsion. We have learned that a contractual obli- 
gation is one which a person takes upon himself volun- 
tarily. It is the essence of a contract that it must be 
freely assumed. 

Kinds of duress. Duress is said to be by imprison- 
ment and per minas, or by threat. The law will not 



56 BUSINESS LAW 

allow one to obtain a contract from another by means 
of his imprisonment. It is duress per minas which 
raises the most difficult questions. What degree of 
threat is required to make a contract voidable? It 
was said in the early law that threats would not in- 
validate a contract unless they were such as to overcome 
the will of a constant and courageous man. Later, 
the view was adopted that such threats must not be 
used as would overcome the will of a person of ordinary 
firmness. But the more modern and better rule is 
that any threats that will coerce the will of the person 
involved, considering all the circumstances of the case, 
will amount to duress. 

UNDUE INFLUENCE 

One may have such influence over another party that 
that which is done by such party may be considered 
as practically dictated by the dominant party. When- 
ever it is shown that such a relationship exists between 
parties as raises a presumption of dominance by one 
party over the other, undue influence will be presumed. 
" Courts of equity have refused to set any bounds to 
the circumstances out of which a fiduciary relation may 
spring. It not only includes all legal relations, such as 
guardian and ward, attorney and client, principal and 
agent and the like, but it extends to every possible case 
in which a fiduciary relation exists in fact, and in which 
there is confidence reposed on one side and resulting 
domination on the other." (Mors v. Peterson, 261 111. 
532.) When a contract has been secured by such a 
person, it may have been fairly secured, but the burden 
of proof is upon the dominant party to show that not- 



THE FORMATION OF CONTRACT 57 

withstanding the relationship, the contract was freely 
made by the other party. 

A contract secured by undue influence is voidable, 
not void ; and consequently it may be ratified by the 
affirmance of the party influenced after the influence 
has ceased to operate. 

Questions and Problems 

(77) A requested B to sign a recommendation whereby A 
could obtain employment in the X Mfg. Co. B agreed and 
signed, without reading, a paper which A presented. The paper 
was a promise to pay money setting forth a valid consideration 
as having been received by B. He is sued upon this paper and 
his defense is that he did not know what he was signing. Is 
this defense good? (Smentek v. Cornhauser, 17 III. Ap. 266.) 

(78) A has a jewel which he thinks to be a topaz. He asks 
B what he will give him for it. B, thinking it also a topaz, replies 
that he will give $1. A sells to B. Both learn later that the 
stone is an uncut diamond worth $700. Can A have the sale 
set aside? 

(79) Plaintiff purchased a twelve acre tract of land. He 
claims that defendant falsely represented the prices at which 
certain sales had been made and the amounts of specific offers 
for similar property in the vicinity and misrepresented the general 
selling price. The defendant claims that such representations 
by him would not constitute fraud in law. How should the case 
terminate? (Brody v. Foster, 158 N. W. (Minn.) 824, L. R. A. 
1916 F. 780.) 

(80) A sells B a patented fence, lauding it as a " good inven- 
tion." B does not find it a good invention. B seeks damages for 
fraud. Can he recover ? 

(81) What is the case in Example 25 ? 

(82) What is the case in Example 26 ? 

(83) What is the case in Example 27 ? 

(84) A buys mining stock from B who makes gross misrep- 
resentations as to the facts. One month thereafter A discovers 



58 BUSINESS LAW 

the fraud. He makes no objection for over a year and then 
seeks to get his money back. Can he recover ? What principle 
is involved ? 

(85) What is duress ; what two kinds ? 

(86) A tells B that unless B will sign a certain contract, he 
will burn down his house. Thereupon B signs. Is the contract 
good, void or voidable ? Why ? 

(87) Define undue influence. When is it presumed ? Can the 
presumption be overcome ? How ? Does undue influence make 
a contract void or voidable ? 



CHAPTER XI 

THE FORMATION OF CONTRACT: (3) CON- 
SIDERATION 

DEFINITION AND NECESSITY OF CONSIDERATION 

What consideration is. We are taught to keep our 
promises. But the law will not require us to keep them 
unless there is a consideration in support of them. It 
is this essential element in simple contracts (whether 
they are in writing or not) which we are to notice in 
this chapter. The English and American law regards 
a promise without consideration as nudum pactum, not 
creative of any legal liability. 

What is consideration? It is frequently defined as a 
detriment to the promisee or benefit to the promisor. 
This means that the promise which is sought to be en- 
forced must have been made mutually with a benefit 
received by the promisor or a detriment sustained by 
the promisee. In other words a promise is not enforce- 
able unless a price has been paid or promised for it. We 
have said that consideration consists in a benefit to the 
promisor or detriment to the promisee, but it is the detri- 
ment to the promisee that is more to be regarded than the 
benefit to the promisor. If a person makes a promise 
which calls for something to be given, done or under- 
taken by another and the other gives, does or undertakes 
that which is called for, it is this fact that is important 

59 



60 BUSINESS LAW 

and it is not usually necessary to consider whether the 
result is actually any benefit to the promisor. Let us 
consider a few examples. 

Example 32. A promises to pay B $1000 
on B's twenty-first birthday, and B agrees to 
accept it. B cannot make A pay, for B has 
given nothing — thing, act, or promise to give 
anything — to A for A's promise. 

Example 33. A promises to sell B a horse 
for $200 upon B's next birthday and B ac- 
cepts. Here there is a price paid by both parties. 
A and B are both promisors. The considera- 
tion for A's promise is B's promise, and vice versa. 

Example 34. A offers a public reward for 
certain information. B brings in the informa- 
tion. A is the promisor. B never was a prom- 
isor but he paid the price which the promise 
called for. 

Example 35. A writes to B that if B will sell 
goods to C, A will pay if C does not. B sells 
the goods on the strength of the promises of both 
A and C. A gets no actual benefit, but in legal 
contemplation B has given up a right on the 
strength of A's promise. It might or might 
not be actually beneficial to A. It is enough 
that it will be detrimental to B to do the thing 
unless A's promise is kept. 

Adequacy of consideration. An adequate considera- 
tion is not necessary to a contract. As one may give 
away what he has, he may agree to part with it for 
whatever price he chooses. To be sure the law will 
not enforce a promise to make a gift ; but if it were to 
inquire into the adequacy of price paid, it would take 
from parties the right of contract to fix their own prices 
and make their own bargains ; and to deny that would 
largely destroy freedom of contract. 

There are aspects from which adequacy of price is 
material as where fraud is alleged and the inadequacy 



THE FORMATION OF CONTRACT 6 1 

of the consideration is a part of the proof ; or where some 
unusual relief of an equitable nature instead of damages 
for breach is being asked for by a party who has driven 
a hard bargain. But mere inadequacy of considera- 
tion is not material in a suit for damages for breach of 
contract. 

EXAMPLES OE CONSIDERATION 

In general. Having now before us the definition of 
consideration and remembering that consideration is an 
essential element in every simple contract whether oral, 
written or implied, let us now look at various situations 
to discover concretely and illustratively what may 
constitute consideration. And first we should notice 
that one may be said to have given a consideration 
whenever he parts with anything to which he has a 
legal right, and, generally speaking, it is of no moment 
how slight the legal right is. 

Promises as consideration. A promise definite 
enough to be enforced, is a good consideration for a 
thing done or promised on the other side. 

Example 36. A promises B that he will sell 
B all the coal B may desire to buy of him during 
the next six months at certain prices. B says 
" I accept." Here there is no contract for B 
doesn't promise to buy any coal or give up any 
right to buy coal from anyone else. (Amer. 
Cotton Oil Co. v. Kirk, 68 Fed. 791.) 

Example 37. A offers B all the coal up to 
100 tons which B may use in his foundry busi- 
ness during the next six months, at prices quoted. 
B agrees that he will buy according to this 
offer. This is a good contract as B gives up 
his right to buy this coal from any other person 
and A must stand ready to deliver the coal 
when ordered. (Nat. Furn. Co. v. Keystone 
Mfg. Co., no 111. 427.) 



62 BUSINESS LAW 

Giving up right of course of conduct. We get a good 
insight into the nature of consideration by noticing 
cases in which one gives up the right to pursue any 
course of conduct which he may legally follow. Thus, 
A's uncle tells A that if he will go to college, he will 
pay him $1000 upon A's twenty-first birthday. A 
goes in response to the promise. A can recover the 
money. A has a legal right not to go to college. He 
foregoes that right upon the uncle's promise. (Hamer 
v. Sidway, 124 N. Y. 538.) 

Performing legal obligation as consideration. Our 
definition of consideration tells us that a legal right must 
be forborne or promised to be forborne. One has no 
legal right not to perform his legal duty, for then it 
would not be his duty. 

Example 38. A promises a sheriff $100 if the 
sheriff will arrest a lawbreaker in his jurisdic- 
tion. The sheriff accepts and makes the arrest. 
He cannot recover the reward. His agreement 
is both illegal and without consideration. 

Performing executory contract as consideration. If 

one promises to dig a ditch for $50 and afterwards says 
that he will not proceed unless he is paid $100, and the 
$100 is thereupon promised and he digs the ditch, the 
logical objection is that he is not giving up any right; 
he was already legally bound to dig the ditch. And 
yet we must also remember that parties may always 
by agreement abandon a contract or a term in a con- 
tract and substitute a new one. But the law in most 
jurisdictions has been laid down that if one threatens 
to break a contract unless he gets more pay, and the 
increase is thereupon promised, and there is no further 



THE FORMATION OF CONTRACT 63 

element in the case, the increase cannot be collected. 
Partial payment of debt as full satisfaction. It was 
decided in some old English cases that a part payment 
of a liquidated debt could not be a consideration for a 
promise to release one's claim for the balance, inasmuch 
as theoretically a debtor gives up nothing he is en- 
titled to, and a creditor gets nothing he is not entitled 
to, when a debt already owing is paid. These early 
decisions have been followed generally in modern law 
although often with great reluctance. If A owes B 
$100 and B agrees with A that if A will pay him $75, 
he will give him a receipt in full or a release of the debt, 
justice would seem to require that this agreement be 
held binding. But the decisions have been otherwise ; 
for, it is said that A parts with nothing to which he had 
any right in return for the release. However, the rule 
is confined strictly to this situation. If there is any 
detriment besides the part payment of the debt, con- 
sideration exists and the release will stand. An example 
will illustrate this. 



Example 39. A owes B, C, D and E each 
$100, all of which debts are due except the one 
to E. Desiring to settle with all his creditors 
at fifty cents on the dollar, he makes separate 
individual agreements with each of them as 
follows: to B he gives $50 upon B's promise 
to release the entire debt ; to C he gives a 
secured promissory note for $50 due in three 
months ; to D he gives a horse worth $50 ; to 
E he makes a payment of $50 at once although 
the debt is not yet due. All of these creditors 
agree to accept what they receive in full payment 
of the debt. The legal results of the various 
agreements are: B may sue for the remaining 
$50 but C, D and E are bound by their promises, 
as being upon sufficient consideration. 



64 BUSINESS LAW 

Liquidation of an unliquidated claim. What has been 
said in the above paragraph and example deals strictly 
with debt whose amount or existence is not in dispute. 
If a claim is unliquidated, any agreement for its liquida- 
tion is enforceable. A claim may be said to be unliqui- 
dated when it is not certain in amount or capable of being 
rendered certain by mere computation. It will be 
deemed unliquidated when (i) there is a bona fide dis- 
pute as to the amount of a debt ; (2) where the claim is 
of a nature (as in case of breach of contract or commis- 
sion of a tort) which either requires an agreement or a 
law suit to establish what amount is due. In such a 
case, manifestly any agreement establishing the amount 
due is based upon a good consideration and is enforce- 
able. 

Example 40. A claims rent from B in the 
sum of $75 for the month of June. B claims a 
set off for repairs made by him which he claims 
that A, as landlord, should have made. A 
claims that he is under no duty to make the 
repairs. B sends A a check for $50 stating that 
it is in full payment of A's claim. Here if A 
agrees to receive the $50 in full settlement ; or if, 
asserting he does not agree to it, nevertheless 
keeps and uses the check, he cannot succeed 
in a suit for the balance. One must retain a 
payment under the conditions on which it is 
sent. Otherwise he should send it back. 
(Note here, that if the debt was liquidated, 
i.e. indisputably $75 and B had sent $50 in full 
payment, A could have so received it, and still 
have sued for the balance, for, although his 
retention would be a retention upon the terms 
upon which the payment was made, there would 
be no consideration making those terms enforce- 
able.) 

Compromise of disputed claim. If the entire claim 
is disputed, any agreement to settle it is supported by a 



THE FORMATION OF CONTRACT 65 

good consideration. The claim must be made, of course, 
in good faith. The claimant gives up his right to have 
his claim tried out in court. This is good considera- 
tion. 

Example 41. A's automobile collides with 
B's automobile injuring B's car. B claims 
damages. A claims that the collision was B's 
fault, but nevertheless promises to settle for 
$100 and B agrees to this. This constitutes a 
contract on which B can sue, and it is absolutely 
immaterial what the result would have been 
had B sued A in court for the injury. The 
agreement will stand and the court will not go 
into the merits of the original controversy so 
long as there was good faith. 

Composition with creditors. What we have said 
above refers to settlement of a debtor with his sole 
creditor or with one of his creditors, or if with more 
than one, by separate contracts with each. Often 
a debtor who is hard pressed by his creditors proposes 
terms of settlement with them to be accepted by them 
in consideration of the assent to the settlement by the 
others. The arrangement may include all of a debtor's 
creditors or a part of them. Non-assenting creditors 
will not be bound. This is called a composition with 
creditors and has always been considered binding, 
whether the debts are liquidated or unliquidated. 

Example 42. A owes B, C, D, E and F 
each $100. He calls them together and they all 
agree with him and with each other to accept a 
compromise. They are bound and cannot 
afterwards assert claim to the balance. 

In conclusion, as to payment of disputed claim and part 
payment of debt as consideration for release in full, we 
may say that a part payment of a debt upon an agree- 



66 BUSINESS LAW 

ment that the part payment is to be received in full 
payment, will operate to discharge the balance of the 
debt, if 

(a) The debt is paid before it is due ; or 

(b) At some place other than where payable ; 

(c) Some new security is given ; 

(d) Some act is done or thing given in addition to 
money or in lieu of money ; 

(e) The amount of the debt is unliquidated ; 
(/) A disputed claim is compromised ; 

(g) A composition by a debtor with his creditors or 
some of them is effected. 

Questions and Problems 

(88) Define consideration. Why do we describe it as a 
detriment to the promisee? 

(89) Is it material in any case whether the promisor was 
actually benefited ? Why ? 

(90) A sells B a horse for $ioo. A refuses to deliver the horse, 
and being sued, attacks the transaction on the ground that the 
consideration was inadequate as the horse was worth $400. Is 
the contention good ? 

(91) A offers to supply B during the season of 1918-1919 with 
all the paper of a certain description which B may desire at cer- 
tain prices. B writes back saying, " I accept your proposition." 
Is there a contract? 

(92) State the case in Example 37. 

(93) A takes a child from an orphan asylum, who, becoming 
homesick, wishes to return. A says, " Stay with me for the time 
being and I will leave you $1000 in my will." The child does 
stay until A's death, but A leaves no will. The child sues the 
estate. Can he recover? (Baumann v. Kusian, 164 Cal. 582, 
L. R. A. N. S. 756.) 

(94) A promises B that if B will name B's child after A, he 
will give B $1000. B does name the child as requested. Can 



THE FORMATION OF CONTRACT 67 

he recover the $1000? (Gardner v. Denison, 217 Mass. 492, 51 
L.R.A.N. S. 1108.) 

(95) A owes B $100. He tells B that he will pay him $75 
if B will take that amount in satisfaction of the entire debt. B 
agrees and gives a receipt to that effect. B afterwards sues for 
the $25. Can he recover? Why? Do you regard the rule as 
good or bad from a business standpoint ? 

(96) Suppose in the case above put (a) that the amount was 
disputed, or (b) that the payment of the $75 was made before 
the $100 was due, or A's secured note for $75 was received by B ; 
in all of these cases the agreement being to receive in full, would 
the agreement legally so operate ? Why ? 

(97) If A injures B and B claims it was A's fault, but A claims 
it was B's fault and finally A agrees to give B $100 to settle his 
claim, will the court allow A when sued for his promise to show 
that B's original claim was invalid? Why? 

(98) What is a composition with creditors ? 



CHAPTER XII 
THE FORMATION OF CONTRACT : (4) LEGALITY 

LEGALITY AN ESSENTIAL ELEMENT IN CONTRACT 

Legality necessary. It is obvious that one cannot 
ask the courts to give him relief in the enforcement of 
an agreement forbidden by law. We need no more 
than state the fact that legality is essential as a basis for 
a consideration of the different types of illegality. 

Why certain agreements are illegal. Agreements are 
illegal because (1) their object is contrary to the common 
law or public policy ; (2) their object is contrary to some 
statute ; (3) their manner of formation is contrary to. 
public policy or statute. 

It is evident that aside from those acts condemned 
as illegal by all men in all ages, the legality of contracts 
is a subject changing with the changing ideas of men and 
with the necessities of the times. 

PARTICULAR CLASSES OF ILLEGAL AGREEMENTS 

Wager contracts. Wager contracts were not illegal 
at common law, unless they tended to a breach of the 
peace or were of a scandalous nature, but statutes have 
made them illegal. A wager contract is one in which a 
risk of loss is created by the agreement itself according 
to some outcome or fact. One may wager or gamble 
on the fall of cards, the outcome of a horse race, future 

68 



THE FORMATION OF CONTRACT 69 

market prices. An option contract whereby one ac- 
quires a right to buy or sell at a future time at prices 
stated, is void, if the intention is to gamble on future 
prices, but otherwise it is good. 

Example 43. A desires to sell B a house but 
B is uncertain, yet wishes to have an option for 
a week. He therefore gives A $100 upon A's 
promise to keep the offer open for a month. 
The contract is not illegal. 

Example 44. A offers to sell B wheat on 
May 30th next at $1.10 a bushel and for $100 
paid, B has until May 30th to refuse or reject. 
If the bargain is not bona fide and the parties 
merely intend to gamble on future prices, the 
agreement is unenforceable. 

Contracts in restraint of trade. A contract in re- 
straint of trade is not void unless it is in unreasonable 
restraint. Such contracts are frequently made in con- 
nection with a sale of a business and are necessary to 
enable one to deliver the good will. But if the agreement 
made is unreasonable, it will be void. Whether it is 
unreasonable depends upon the question of what is 
necessary for the protection of the purchaser. 

Example 45. A has a restaurant in the 
business center of the city of Chicago. He sells 
it to B, agreeing that he will not for the period 
of ten years compete with B in the restaurant 
business within a two mile radius of the location 
of the restaurant. This agreement is reasonable 
and if A could not make it, he would really not 
be able to secure B in his acquisition of the good 
will which is perhaps the most valuable part of 
the business. If the agreement had been not 
to engage in the business anywhere in Illinois 
the agreement would have been void, as such 
limits would be unnecessary for B's protection. 

What contracts are in illegal restraint of trade is now, 
from some standpoints, a subject of much controversy 



70 BUSINESS LAW 

and in process of development. With the means of 
rapid transit of intelligence and goods now at our com- 
mand, enterprises of truly national scope cannot have 
proper protection against the competition of the seller 
of such a business unless he agrees not to compete at 
all or at least in very restricted districts. But in any 
event the restraint must be reasonable under the facts 
of the case. 

Agreements of monopolistic tendency. Monopoly has 
always been contrary to the principles of the common 
law notwithstanding the practice of some English 
monarchs of granting monopolies. In the United States 
we have the well-known Sherman Act and the subsequent 
federal enactments making monopolies illegal and con- 
templating their prevention. The states have various 
anti-monopoly or anti- trust statutes. Not only do we 
have these various statutory provisions, but monopolies 
are obnoxious to the common law. 

What is monopoly? It consists in the control of the 
sources of production. Such control need not, of course, 
be absolute. Agreements for the purpose of stifling 
competition and keeping up prices are monopolistic. 

The corporate " trust " is monopolistic and has been 
frequently declared illegal. Now the word " trust " 
has in law a much larger meaning than that in which it 
is used to indicate illegal combination of companies, 
and is one of the useful inventions of the law. It per- 
mits one to hold property for the use of another, 
as property left to A in trust for B. In this way 
estates can be kept intact while dividing the reve- 
nue, and spendthrifts and inexperienced persons can 
be given the benefit but not the control of properties. 



THE FORMATION OF CONTRACT 71 

This method of holding property was made use of by 
corporations to create combinations of rival companies 
to eliminate competition, give a common control and 
keep up prices. Such " trusts " are deemed illegal be- 
cause of their objects. 

Example 46. The A, B and C corporations 
are in the same line of business. A scheme is 
promoted by which the stockholders of all the 
companies convey their stock to a common 
board, who hold such stock in trust, issuing 
trust certificates. In this way the stockholders 
still enjoy dividends, but the control of their 
property passes out of their hands and is vested 
in the common board. This scheme is illegal. 

Corporation not illegal merely because large. A 

corporation is not an illegal thing merely because of its 
immensity. It is only when a corporation is guilty 
of unfair trade and of practices of monopolistic tenden- 
cies that the law will make it an object of attack. 

Agreements tending to demoralize public service. 
Any agreement whose tendency (no matter what its 
actual result) is to demoralize the courts, the legislature 
or any branch of the public service, is illegal. Thus, 
of course, agreements to bribe, to suborn perjury or 
to buy votes, are illegal. So are lobbying agreements 
(agreements by which legislation is to be procured 
through personal solicitation), although it is not illegal 
for one to be employed to openly appear before legisla- 
tive committees to present a certain viewpoint and 
urge legislation consistent therewith. It is the tend- 
ency of lobbying and all agreements affecting public 
service which makes them illegal, not the motive or 
the actual result. 



72 BUSINESS LAW 

Example 47. The B corporation procures 
A to go to the capitol for lobbying purposes to 
obtain the passage of a certain bill. A believes 
in the bill and undertakes to use his personal 
influence to get it enacted. A afterwards sues 
for his fee and the corporation pleads that the 
agreement was illegal. The facts that A's mo- 
tives were good, that the bill was a good bill or 
that it would have passed without A's services 
are immaterial. The tendency of such an 
agreement is to produce corruption and it is 
therefore deemed illegal and is forbidden. 

Usurious agreements. Usury is the taking of a 
greater rate of interest than is permitted by law. It is 
deemed illegal in the sense that it is not enforceable and 
under some laws entails a penalty, as for instance, the 
loss of all interest. The law of usury is quite different 
in the various states, although in nearly every state 
there is a law of usury. 

Sunday agreements. An agreement made on Sunday, 
or to be performed on Sunday, is, by an old English 
statute, illegal, unless a work of charity or necessity. 
This statute has been copied in many jurisdictions, but 
in some states Sunday contracts are not contrary to law. 

Questions and Problems 

(99) A agrees with B that he will pay B $ioo if the M ball 
team wins a certain game, in consideration that B will pay him 
$ioo if it does not win. Is this agreement enforceable? 

(100) A company having a business local to the State of 
Illinois sells it to B under the agreement that the seller shall not 
engage in that business anywhere in the United States. Is the 
agreement void? Why? 

(101) What is corporate " trust " ? Monopoly ? 

(102) The consul general of Turkey made a contract with a 
manufacturer of firearms, by which the consul, for an agreed 



THE FORMATION OF CONTRACT 73 

commission, was to effect, through his influence with govern- 
ment agents, sales of the arms manufactured by the concern with 
which he contracted. Is the contract good? (Oscanyan v. 
Winchester Repeating Arms Co., 103 U. S. 276.) 

(103) What is usury ? What is the law on the subject ? 

(104) Is an agreement made on Sunday enforceable? 



CHAPTER XIII 
THE FORM AND EXPRESSION OF A CONTRACT 

GENERAL STATEMENT 

A contract may be in any form in which the parties 
choose to put it except where the law, for reasons of public 
policy, requires particular kinds of contracts to be 
expressed or evidenced in a certain way. The general 
rule is then that any contract may be oral or implied, 
or written or under seal, as the parties may choose to 
have it, but certain classes of contracts are required by 
law to be proved by or expressed in a certain form. The 
form in which contracts may exist and which are to 
be considered by us are (i) oral contracts ; (2) implied 
contracts; (3) contracts in writing; (4) contracts in 
writing under seal. 

ORAL CONTRACTS 

Sometimes one hears it said that there is no contract 
between parties unless some written instrument has been 
drawn up between them, but a contract may, and very 
frequently is, merely oral, and it is in that case just as 
enforceable as though it is in writing unless it comes 
within the provisions of some statute requiring that 
particular sort of contract to be in writing. It is 
true that an oral contract is not satisfactory where the 
parties differ in their memory of just what transpired, or 

74 



THE FORM AND EXPRESSION OF A CONTRACT 75 

where one of them unjustly denies that there was any 
contract, thus making the proof by the other more 
difficult and perhaps impossible. But this is a diffi- 
culty in the matter of evidence and does not go to the 
requirements of a contract as such. 

IMPLIED CONTRACTS 

Any contract that may be oral may be implied or 
partly implied. An implied contract is one in which 
the parties speak by their actions rather than by their 
oral or written words. It is as truly a contract as 
though words had been spoken, signifying offer, accept- 
ance and consideration. 

Example 48. A requests B to help him build 
a house, and B acceding to the request performs 
the labor desired. Nothing is said about 
wages, but it is to be inferred, according to the 
reasonable interpretation to be put upon the 
acts of the parties, that A expects to pay and 
B expects to have the prevailing wages for that 
class of work in that community and B can sue 
for and recover such wages. The promise to 
pay is implied. 

We say that an implied contract exists whenever the 
more reasonable explanation will show the relationship 
of the parties as being that of contract rather than that 
of some other relationship. If some other explana- 
tion is more reasonable, then the contract will not be 
inferred although it may be shown to exist by express 
agreement. 

Example 49. A's house being on fire, A re- 
quests his neighbor to help him carry out furni- 
ture, saying nothing about pay. No contract 
would be inferred in this case as it is a more 
reasonable explanation that A expected B to 
perform the act in a neighborly spirit, and that 



76 BUSINESS LAW 

B intended to do so, but if A expressly promised 
B pay for the services then that could be shown. 
Example 50. A's son B stays at home upon 
the farm and does work for A. After A's 
death, B puts in a claim for services. B would 
have to show in this case something further 
than the facts stated, as the filial relationship 
explains the case more reasonably than that 
of contract. If B had been a stranger, then the 
inference would be that of contract between the 
parties unless it could be shown that B agreed 
to do the work without charge. (Hertzog v. 
Hertzog, 29 Pa. St. 465.) 

We sometimes see the term " contract implied in 
law " as distinguished from the contracts above de- 
scribed which are said to be implied in fact. A con- 
tract implied in law is not really a contract at all but 
merely a set of facts from which the law will raise an 
obligation to pay regardless of the intention of the 
parties because of the justice of the situation. Thus A 
agrees with his housekeeper B that if she will remain with 
him until his death he will give her some land. He dies 
without having carried out his promise. This promise 
is too vague and uncertain to be enforceable, and there 
is not really a contract between the parties because of 
the uncertainty and indefmiteness of the terms stated 
between them. But the law will allow B to have rea- 
sonable wages from the estate as a matter of justice as 
upon a contract implied in law. But it is a misuse of 
terms which is to be regretted that such an obligation 
should ever have been described as a contract, as the 
parties never did contract for wages. 

WRITTEN CONTRACTS 

Contracts which cannot exist except in writing. Some 
particular contracts cannot have any existence unless 



THE FORM AND EXPRESSION OF A CONTRACT 77 

they are in writing. In fact the very definition of some 
sorts of contracts signifies writing. For instance, we 
cannot have a promissory note, a bill of exchange, a 
check, a bond or a deed to real estate unless there is a 
written instrument. 

Contracts which cannot be enforced unless the evi- 
dence is in writing. The Statute of Frauds and Per- 
juries. In the seventeenth century in England it was 
considered by Parliament that perjury and fraud were 
frequently accomplished by means of false swearing 
to the existence of certain classes of contracts or to their 
denial. It was thought that reform in this regard could 
be accomplished by requiring the proof of such contracts, 
when sued upon, to consist in written evidence, signed 
by the parties sought to be charged, in cases in which 
the defendant denied the existence of the contract sued 
upon. Accordingly, in 1677, a famous statute was 
enacted which has persisted in the law until the present 
time in almost the same phraseology in which it was 
then passed, and which was entitled the " Statute of 
Frauds and Perjuries. " The purpose of this statute 
is to require a certain form of proof which would elimi- 
nate the temptation and possibility of false swearing. 
Parliament did not by any means enact that all con- 
tracts must be so proved, but picked out certain excep- 
tional classes of cases in which it regarded the danger 
as greatest. The contracts which were included are set 
out in the paragraphs following. There were two sec- 
tions of this statute which concerned contracts and 
which are known as the fourth and seventeenth sections. 
They are in force substantially as then enacted through- 
out the American states, and the seventeenth section, 



78 BUSINESS LAW 

which covered the case of sales of personal property, 
has been incorporated into the Uniform Sales Act. On 
account of the fact that this statute has such an impor- 
tant part in English and American jurisprudence, it is 
desirable to set forth these sections verbatim. They 
read as follows : 

" That no action shall be brought (i) whereby to charge any 
executor or administrator upon any special promise to answer 
damages out of his own estate; (2) or whereby to charge the 
defendant upon any special promise to answer for the debt, 
default, or miscarriage of another person; (3) or to charge any 
person upon any agreement made upon consideration of marriage ; 
(4) or upon any contract for the sale of lands, tenements or heredi- 
taments, or any interest in or concerning them ; (5) or upon any 
agreement that it is not to be performed in the space of one year 
from the making thereof ; unless the agreement upon which such 
action shall be brought, or some memorandum or note thereof, 
shall be in writing and signed by the party to be charged there- 
with, or some other person thereunto by him lawfully authorized." 
(4th Section.) 

" That no contract for the sale of any goods, wares and mer- 
chandise, for the price of ten pounds sterling or upwards shall 
be allowed to be good, except the buyer shall accept part of the 
goods so sold, and actually receive the same, or give something 
in earnest to bind the bargain, or in part payment, or that some 
note or memorandum in writing of the said bargain be made 
and signed by the parties to be charged by such contract, or their 
agents thereunto lawfully authorized." (17th Section.) 

Promises by administrators and executors. A prom- 
ise made by an executor and administrator to pay 
debts of the estate out of his personal estate cannot be 
enforced unless there is a written memorandum signed 
by the executor or administrator. 

Promises to pay for the debt, default or miscarriage 
of another person. Such promises are not enforceable 



THE FORM AND EXPRESSION OF A CONTRACT 79 

unless there is a written memorandum signed by the 
party sought to be charged. This phrase chiefly covers 
the case of contracts of guaranty made by one to an- 
other's creditor. 

Example 51. A desires to obtain credit for 
goods purchased from B. B advises him that 
he will extend credit to him if he can secure a 
guarantor. A thereupon induces C to promise B 
that if A does not pay for the goods, he, C, will. 
C's promise is not enforceable unless there is a 
written memorandum signed by C proving the 
existence of the promise. It is immaterial v/hat 
other proof B might have; unless he has a 
written memorandum to which C has attached 
his signature, he cannot enforce C's promise. 
Of course if C made such a promise he should 
in all honesty make good and in a great many 
cases the guarantor would not take advantage 
of this technical defense. 

The statute was passed to prevent claims against al- 
leged guarantors who did not make any such promises 
but must of course apply to all cases whether there was 
any real promise or not, otherwise the statute would be 
of no effect. It is therefore seen that the statute which 
was passed to prevent frauds can be made the means of 
accompHshing fraud, but it is regarded that the fraud 
which it prevents covers more cases than the fraud 
which it encourages. 

Agreements made in consideration of marriage. A 
promise made in consideration of marriage is not en- 
forceable unless in writing signed by the person sought 
to be charged. This clause includes ante-nuptial 
marriage settlements. It does not include mutual 
promises to marry which are enforceable though not 
in writing unless some local statute makes that pro- 
vision. 



80 BUSINESS LAW 

Contracts for the sale of real estate or any interest 
therein. A contract for the sale of real estate or any 
interest in real estate is not enforceable unless there is 
a memorandum signed by the party who is sought to 
be charged. This covers cases of contracts to sell] a 
parcel of real estate, to make leases, to grant easements, 
to execute mortgages and to give any interest of any 
sort in real estate. The statutes in the United States 
usually except from the provisions of this clause short- 
term leases, as for one or three years, which are enforce- 
able in such cases although oral. 

Example 52. A having a coal mine contracts 
with B to allow B to enter upon his land and 
mine coal in certain quantities and to take the 
same away. This agreement is not enforceable 
by either party unless the other party has a 
written memorandum signed by the party 
whom he attempts to charge. 

Example 53. A agrees to mine iooo bushels 
of coal and deliver it to B's place of business for 
certain prices and at certain times. The con- 
tract is oral. Either party can enforce this 
contract against the other as far as this sec- 
tion of the statute is concerned, for the contract 
is to sell personal property before the sale or 
transfer of title can take place. In the same 
way a sale of furniture would not be within this 
clause of the statute even though the timber 
from which the furniture was expected to be 
made was still growing. 

Sales of personal property are not enforceable unless 
in writing as we shall see if there has been no part pay- 
ment or part delivery. In Example 53 there might have 
been a part payment which would make the contract 
enforceable notwithstanding there was no writing. 

Contracts which would require more than a year for 
performance. Such contracts are not enforceable un- 



THE FORM AND EXPRESSION OF A CONTRACT 8 1 

less there is a written memorandum by the party sought 
to be charged. This section only covers contracts which 
cannot be performed within a year by their terms, or 
in the nature of the case. If a contract can be per- 
formed within a year, even though it may not be in- 
tended that it shall be so performed, it is enforceable. 

Example 54. A and B make an agreement 
whereby B is to work for A for fifteen months 
from date. Neither party can enforce this 
agreement unless there is a written memoran- 
dum signed by the party sought to be charged. 

Example 55. A agrees to do certain work 
for B and to have it completed within fifteen 
months. This contract is enforceable though 
entirely oral because it may be completed within 
twelve months from the date of the contract 
although it may not be expected by either 
party that such shall be the case. 

Contracts for the sale of personal property. A con- 
tract for the sale of personal property is not enforceable 
if the price agreed upon or implied is of a certain amount 
or over unless there is a written memorandum signed by 
the party sought to be charged, or unless there is a part 
payment or a part delivery and acceptance. It will 
be noticed that the seventeenth section of the Statute 
of Frauds provides for three ways of compliance, while 
the fourth section covering all the above cases contem- 
plates only one way of compliance. Under the seven- 
teenth section relating to sales, a sale of personal prop- 
erty is enforceable though not in writing if there has 
been a part payment or a part delivery and acceptance. 

Example 56. A sells iooo bushels of wheat 
to B for the sum of $iooo. This agreement is 
not enforceable unless there is (i) a written 
memorandum signed by A or B depending upon 
which party we seek to charge, or (2) unless B 

G 



82 BUSINESS LAW 

has paid A all or a part of the purchase money, 
or (3) unless A has delivered to B all or part of 
the wheat and B has accepted the same. 

The memorandum and the signature. The memo- 
randum required by the Statute of Frauds need not 
be of a formal character and may consist of entries in 
a notebook or upon any form of paper, and is sufficient 
if it merely notes down the terms and describes or names 
the parties. The purpose of the Statute of Frauds is 
not to require a formal draft of contracts which it 
covers. Indeed in many commercial cases the memo- 
randum would be usually made in a more or less crude 
form, perhaps in lead pencil, and this would be sufficient 
as the only purpose of the statute is to prevent fraud and 
perjury in stating contrary to fact. The memorandum 
must sufficiently identify the subject matter and the 
parties. However, it is provided in many states that 
the consideration need not be in writing but may be 
proved by parol testimony to complete the evidence of 
the contract. 

The memorandum may be made at any time prior 
to suit or even after suit is begun. There are cases in 
which a person desiring to get out of a contract of this 
sort has furnished the only evidence against himself by 
writing a letter in which he states he will not perform the 
contract. The existence of the contract is therefore 
proved by his own statement that he will not perform 
it. There is no purpose gained in requiring that the 
memorandum must be made at the time the contract 
is made, because if the party who desires to perform the 
contract can produce a written memorandum of its 
existence which is signed by the other party, the pos- 



THE FORM AND EXPRESSION OF A CONTRACT 83 

sibility of perjury has been as effectually done away with 
as though the memorandum has been made at the time 
the contract was made. 

Upon the same reasoning it is immaterial that the 
signature of one party is lacking if the signature of the 
party sought to be charged is present. The party 
sought to be charged is usually the defendant or the 
party sued, and if his signature has been placed to the 
memorandum showing that he made a contract with the 
plaintiff no purpose would be served in requiring that 
the plaintiff's signature should also be attached. 

The signature need not be at the bottom of the memo- 
randum if included within the body and meant as a 
signature, as where one should say " I, John Smith, 
hereby have sold to Henry Jones," etc. 

CONTRACTS UNDER SEAL 

A contract under seal in olden times was a contract 
upon which as a sort of signature a piece of wax was 
attached bearing an impression, but in these days a 
scroll or scrawl opposite the signature has usually, 
and in most states legally, taken the place of the wax 
substance. By the early law this form of contract was 
of much more importance than it is to-day, as legisla- 
tion has minimized, if not altogether abolished, its 
legal effect in many states. At common law a contract 
under seal did not need to be supported by considera- 
tion and all contracts were fundamentally divisible into 
two sorts ; the contract under seal or " specialty " 
and all other contracts (whether written, oral or 
implied) known as simple contracts, or contracts by 
parol. 



84 BUSINESS LAW 

As a matter of fact the seal in early days was the 
signature of the party to the contract and has his- 
torically been replaced by the signing of the name which 
is now the custom, but the law in its regard to legal 
forms and ideas still retains, especially in some states, 
much of the law in respect to sealed contracts. It was 
the law, and is still the law in some states, that certain 
instruments were not effectual unless under seal, as, 
for instance, deeds to real estate, powers of attorney 
to execute sealed instruments, and bonds ; and any other 
contract might be put under seal, and if that were the 
case, then took to itself all of the qualities of a sealed 
instrument. It has seemed to many law students of 
modern times that the present existence of the law of 
the seal in modern jurisprudence is without reason and 
that it should utterly be abolished; as will no doubt 
be the case in due course of time. 

THE PAROL EVIDENCE RULE 

There is a rule called the " parol evidence rule " in 
contracts which should have some discussion in connec- 
tion with our consideration of the form or evidence of 
the contract. 

Briefly stated, the parol evidence rule is a rule en- 
forced by the courts in the trial of cases by which the 
effect of a written instrument cannot be changed by 
evidence of contemporaneous or prior oral agreements 
altering, adding to or contradicting the writing. The 
reason of this rule is that the writing is to be considered 
as having been intended by the parties to be the per- 
manent expression of their contract. The rule does 
not prevent a contract from being partly oral and partly 



THE FORM AND EXPRESSION OF A CONTRACT 8$ 

in writing where the writing does not purport to be the 
entire contract, as in case of a promissory note given 
as a part of a contract otherwise oral. In such a case 
the written part could not be added to, altered or con- 
tradicted as a part. If, for instance, the note called for 
interest at seven per cent it could not be proved that 
there was an oral agreement that it should be only six 
per cent. 

The rule does not prevent a person from showing that 
he has been defrauded into signing a contract ; or that a 
contract legal by its terms is in fact for an illegal pur- 
pose ; nor does it forbid a person showing that the terms 
used are used in reference to customs and usages. 

Example 56 a. A buys a refrigerating plant 
and receives a bill of sale. He claims that the 
seller orally warranted the refrigerator to do 
certain work, and that it will not do such work. 
This evidence is inadmissible as it would alter 
the terms of the bill of sale. (A could show 
an implied warranty to this effect, if under the 
circumstances such a warranty would be im- 
plied.) 

Questions and Problems 

(105) Is writing essential to contract ? 

(106) A requests B, a workman, to work upon A's yard. B 
works for a month upon the task assigned. Upon what theory 
does A owe B anything and how much? 

(107) What is the case in Example 50? Why is a different 
result reached than in the case above? 

(108) What is the Statute of Frauds and Perjuries? What 
is its aim and how is that aim attempted to be accom- 
plished? Is the statute (or similar one) in force in our law 
to-day ? 

(109) A sells goods to B upon C's oral promise that if B 



86 BUSINESS LAW 

will not pay for the goods, he, C, will. What defense has C when 
sued by A ? 

(110) A orally tells B to let C have goods and charge the bill 
to B. Is the Statute of Frauds applicable? Why? 

(111) State Examples 52 and 53 and show the distinction 
between them. 

(112) A orally agrees to do certain work for B to be finished 
within eighteen months. A afterwards breaks his contract and 
is sued by B. He pleads the Statute of Frauds. Is it a good 
defense ? Why ? 

(113) State Example 56. 

(114) A makes an oral contract with B for the sale of $1000 
worth of personal property. Afterwards A refuses to carry out 
his contract and B threatens suit. A thereupon writes B a signed 
letter in which he substantially sets forth the contract and again 
states he will not perform it. B sues A. A pleads the Statute 
of Frauds. Is his defense good ? 

(115) Is a memorandum in lead pencil sufficient to satisfy 
the Statute of Frauds? 

(116) What is a contract under seal? What in ancient law, 
and now even, in some states, is its legal effect ? 



CHAPTER XIV 
TRANSFER OF CONTRACT 

THE RIGHT OF TRANSFER 

Can one who is an original party to a contract transfer 
his rights and obligations thereunder to another? This 
is the question to be answered in the present chapter. 
We should bear in mind at the outset that when one 
person contracts with another he takes upon himself 
obligations towards, and acquires rights with, a person 
with whom he has chosen to deal. It has repeatedly 
been declared by the courts that a person may choose 
with whom he will contract. I may be willing to 
buy a horse from A and not be willing to buy the same 
horse from B. Personality, skill, credit, reputation, is 
everything in contract. If, therefore, one may choose 
at the outset with whom he will contract, the law will 
not nullify this principle by permitting a transfer by 
the party so chosen to another party, with whom the 
first party has not chosen to deal. It would seem, there- 
fore, on first consideration that assignment of contract 
would be a forbidden thing in law except with the con- 
sent of all concerned. But other considerations appear 
which qualify the general rule. In the first place, com- 
mercial convenience demands that things both tangible 
and intangible be merchantable as long as no other 

87 



88 BUSINESS LAW 

stronger rule of public policy prevents, and we are then 
led to notice that when one is a party to a contract, 
he may acquire rights thereunder, a transfer of which 
cannot possibly affect the real contractual status of the 
parties. Such rights he is therefore allowed to assign 
without the consent of the other party. We may say, 
as a conclusion of our thought thus far, that in speaking 
of assignment of contract, a correct analysis of the situa- 
tion requires us rather to speak of it as assignment of 
a right under a contract, or assignment of an obligation 
under a contract, and that either right or obligation may 
be assigned if the party from whom the right is owing 
or to whom the obligation is owing, consents, but that 
without the consent of the other party, one cannot 
assign obligations which he owes to another (with some 
unimportant exceptions we need not notice here) but 
can assign his rights against another when that assign- 
ment does not interfere otherwise with the contractual 
rights between the parties. Rights to personal services 
cannot be assigned. The following example will eluci- 
date this paragraph. 

Example 57. P employs A at a salary of 
$100 per month as a salesman. P's obligations 
to A are to pay his salary and to perform the 
other terms of the contract. P's rights are to 
have A's services. A's obligations are to work 
for P according to the terms of the contract ; his 
right is to receive his salary and such other 
things as the contract calls for. If A's consent 
is lacking, P cannot assign to C his obligations 
towards A, or his right to A's services. If P's 
consent is lacking, A cannot assign his right to 
work for P, but he can assign his right to his 
salary, for it is immaterial to P to whom he pays 
the salary. The assignment of the salary does 
not disturb the relationship between P and A. 



TRANSFER OF CONTRACT 89 

THE RIGHT OR TITLE OF THE ASSIGNEE 

What it consists of. The assignee can take only the 
title or right of the one from whom he takes his transfer. 
If, for instance, a right to a salary is assigned, the as- 
signee will take it subject to all the defenses which the 
employer would have against the employee, prior pay- 
ment, failure to earn it, set off, or whatever it may be. 
For, manifestly, the obligations of the contract ought 
not to be enlarged by the other party's transfer of his 
rights, inasmuch as the right to assign is not a contem- 
plated object of the parties when the contract is made. 

When right or title perfected. The title of an as- 
signee, as between himself and the assignor, is com- 
plete at once when the assignment is made, but as 
against the other party to the contract, there is no 
right until such party is notified that the assignment 
has been made; for the obvious reason that he need 
take no thought of the possibility of assignment until he 
is given information to that effect. 

NEGOTIABLE ASSIGNMENT 

If the subject matter of assignment is negotiable 
paper, the assignment is called negotiation, and that 
which has been said in this chapter is not applicable. 
The subject of negotiable paper is treated at length 
hereafter. 

Questions and Problems 

(117) Set forth Example 57, explaining in your own words 
the points and principles involved as applied to the facts therein 
stated. 

(118) A, on July 1st, asks B to loan A money upon A's Septem- 
ber salary. He, also, on the same day, borrows money from C 



90 BUSINESS LAW 

and assigns his October salary. He does not work at all during 
September, but does work during October, drawing his salary, 
however, on the first of the month. B and C both present their 
claims upon A's regular pay day. Has the employer a defense 
to either claim? 

(119) What should C have done in the above case to have 
protected himself against A's act in anticipating his salary as 
stated ? 



CHAPTER XV 
DISCHARGE OF CONTRACTS 

MEANING OF DISCHARGE 

We have seen how a contract may be formed, and have 
discussed something of its operation. Having thus come 
into existence as a binding thing, how may it be dis- 
charged? How may the party bound by it cease to 
be bound? A contract signifies an obligation upon the 
parties. By discharge of contract we mean the dis- 
charge of that obligation. 

MEANS OE DISCHARGE 

In general. There are a number of ways by which 
a contract may be discharged. The most obvious and 
most common is that of performance. It is the only 
way ordinarily contemplated by the parties. Never- 
theless, other modes of discharge arise as we shall note 
in this chapter. 

Discharge by performance. When one enters into 
a contract he undertakes to do, or to refrain from doing, 
something definite. He discharges the obligation of 
his contract by performing it. Thereafter he is no 
longer under a contractual obligation ; what he promised 
to do, he has done. If sued, he has the defense that he 
has performed, and if the other party has not performed, 
he is in a position to sue. This suggests the question 

91 



92 BUSINESS LAW 

as to whether he always must have performed before 
he can call upon the other for performance or damages 
for non-performance, and that question may be answered 
next. 

When one must perform, or tender performance 
before he can call upon the other for performance. 
This depends upon the terms and intent of the contract. 
The obligation of one party to perform a contract or 
some promise thereof may precede, concur with or be 
subsequent to the obligation of the other to perform. 
For this reason we speak of one's performance as being 
conditional upon the other's performance, and the 
conditions as being precedent, concurrent and sub- 
sequent. The subject will not be clear without illus- 
trations and the following are here given. 

Example 58. A agrees to deliver to B a deed 
to A's real estate upon the payment of the pur- 
chase price of $3000 ; $1000 to be paid in June, 
$1000 in July and $1000 in August. Here B's 
payment of the first $1000 is independent of 
anything to be done by A, likewise his payment 
of the second $1000, but upon his payment of 
the third he is entitled to his deed, and need 
not pay it, unless concurrently with such pay- 
ment he receives the deed. If B were sued for 
not paying he could show that he made a 
tender of the money and requested the deed, 
and that delivery thereof was refused. Here 
is an example of discharge of obligation by 
tender. Whenever two things are to be con- 
currently done, the one in return for the other, 
tender is sufficient if the other will not perform 
his part. The law would not compel the seller 
to part with his deed until he got full payment, 
nor compel the buyer to pay the money unless 
he got his deed, although he could be sued for 
two monthly payments according to his con- 
tract, with nothing done on the seller's part. 

Example 59. A agrees to work for B for one 



DISCHARGE OF CONTRACTS 93 

month at a salary of $100, payable at the end 
of the month. A's entire month's services are 
to be performed before B's obligation of pay- 
ment arises. 

Discharge by impossibility of performance. If per- 
formance of a contract is impossible will that fact dis- 
charge the obligation? We cannot say yes or no to 
that question as it stands, but must qualify it. Un- 
doubtedly in some contracts the impossibility of per- 
forming it is within the intention of the parties as a 
fact to discharge the obligation. But in some cases 
one contracts to do a thing whether he can or not ; if he 
cannot, he must pay damages. 

Example 60. A agrees to mine for B 100,000 
tons of coal per year out of a certain mine be- 
longing to B. Seventy thousand tons are 
produced and the mine is exhausted. The im- 
possibility of producing 100,000 tons discharges 
the obligation to do so. 

Example 61. A agrees to furnish bolts for 
B by a certain time. A's factory burns down 
and he finds it impossible to perform. A is 
not discharged unless it is so provided in the 
contract. 

Example 62. W agreed with H that he 
would find a purchaser within a year for a cer- 
tain tract of real estate at $30 per acre. He 
does not find such purchaser and H sues. He 
defends that it was impossible to find such pur- 
chaser. The defense is not good. His under- 
taking was absolute. 

Substantial performance. While it is generally true 
that one must literally perform his contracts in order 
to discharge his obligation, a doctrine has been es- 
tablished that in contracts involving considerable de- 
tail, a substantial performance made in good faith will 
be sufficient to discharge the contractual obligation and 



94 BUSINESS LAW 

thus give one either a right to sue upon the contract 
and recover upon its terms, or a defense against a suit 
for damages on account of breach, although an adjust- 
ment on account of the immaterial departure may be 
required. 

Breach of contract. If a contract is not at least 
substantially performed, or is not performed at all, 
then there is a breach of the contract, unless some lack 
of performance was brought about by the other's fault 
or has been waived. Thereafter the party breaking the 
contract can neither sue thereupon for damages, nor suc- 
cessfully defend against a suit for damages by the other 
party. It is true that where one does not even sub- 
stantially perform, yet, without willful disregard of the 
other's rights, does confer some benefit upon him not 
given back, a suit may be maintained for the actual 
benefit to the other party, taking into consideration his 
damages. Such a suit is not upon the contract, but 
merely for the reasonable value of the benefits conferred, 
and constitutes another example of quasi-contract or 
contract implied in law. 

Discharge by agreement. Another means of dis- 
charging a contract between the parties is by agreement. 
The entire contract may thus be terminated or any of 
its terms changed. 

Discharge by alteration of written agreement. If 
one party to a written contract, without the other 
party's consent, alters any material term of the docu- 
ment, he precludes himself from a suit thereupon. This 
doctrine is usually applied to suits upon bonds, notes and 
other formal papers. One must be very careful to let a 
written document stand as it has been delivered to him. 



DISCHARGE OF CONTRACTS 95 

Discharge by bankruptcy. Bankruptcy laws are 
passed to provide for the discharge of an insolvent 
person from his debts upon his compliance with the law 
in good faith and the surrender of his property for the 
benefit of his creditors. Insolvency laws, as distin- 
guished from bankruptcy laws, do not always discharge 
from debt except with the consent of the creditors. The 
various states of the Union have the power to enact in- 
solvency and bankruptcy laws, provided the federal 
government has no law upon the subject in force. 
When there is such a federal law the state laws are 
suspended. 

There is now a federal bankruptcy law in force 
known as the Bankruptcy Act of 1898, with several 
amendments. Under this Bankruptcy Act any person 
may, for the relief of his insolvency, apply for a dis- 
charge of his debts and creditors may apply to have an 
insolvent debtor made a bankrupt. If the debtor 
applies the proceeding is called voluntary bankruptcy; 
if the creditor applies the proceeding is called involun- 
tary bankruptcy. 

Any person owing debts may file a petition to be 
adjudged a bankrupt. But a person must owe $1000 
or upwards to be adjudged an involuntary bankrupt. 

After the petition is filed, adjudication by the court 
that the debtor is a bankrupt follows unless the debtor 
contests. If he does contest, adjudication will follow 
in case he loses the contest, otherwise the proceedings 
will be dismissed. 

In the administration of the estate, a trustee is ap- 
pointed to take title to the bankrupt's property and take 
possession and charge thereof for the benefit of creditors. 



96 BUSINESS LAW 

Prior to his appointment, a receiver may be appointed 
as a temporary officer to take charge of the estate pend- 
ing the election of the trustee, but only in cases where 
his appointment is absolutely necessary for the pres- 
ervation of the estate. 

The creditors present their claims and the assets are 
proportionably divided among them and paid as divi- 
dends. If the bankrupt is afterwards allowed his dis- 
charge, the amount of dividend received by a creditor 
constitutes the full amount to be received by him for 
his debt. 

The bankrupt must apply for his discharge in bank- 
ruptcy. It is this discharge which is of the utmost 
importance to him, for without it he will be still liable 
for his debts except in so far as they are paid by the 
dividends. A bankrupt will be refused a discharge if 
any creditor objects and it appears that the debtor has 
committed certain offenses specified in the Bankruptcy 
Act, such as having concealed, or destroyed, or refused 
to keep books with the intent of concealing his financial 
condition, refusing to answer any material question 
put by the court, etc. 

Claims which are secured are not discharged in bank- 
ruptcy, as the purpose in taking a mortgage or other 
lien on property is to guard against the results of in- 
solvency. 

Discharge by statute of limitations. If one person 
claims a right to sue another, he ought to assert that 
right, within a reasonable time after it accrues, while 
the evidence is fairly fresh in the minds of the parties 
and the witnesses. Accordingly the law has said that 
if a person is sued after a passage of a certain length of 



DISCHARGE OF CONTRACTS 97 

time named in the law he may plead that fact as a de- 
fense to the proceeding and need not go into the merits 
of the controversy. The limitation named by the law 
differs in different states and also differs according to 
the nature of the liability. As an illustration, the time 
given to sue for a tort damage may be two years, upon 
an oral contract, five years, upon a written contract, ten 
years. 

Admission in writing of liability, payment of part of 
debt or interest after the right to sue has accrued, will 
extend the time. It will begin to run again from the 
time of such admission or payment. 

The statute does not bar the suit unless it is relied 
upon. A defendant may want to defend on the merits 
notwithstanding he has a right to the technical defense 
of the statute. 

Example 63. A sues B upon a note dated 
July 1, 1 901, and due July 1, 1902. B paid in- 
terest on this note up to 1907. He then 
stopped payments. A sues July 1, 191 8. The 
statute of the state requires suit to be brought 
upon notes within ten years. B pleads this 
statute. The defense terminates the suit. 
Whether B owes the money cannot be gone 
into. A should have asserted his right by 
starting suit before the time expired. If the suit 
had been started in 191 6, the statute would not 
have run. 



Questions and Problems 

(120) What is the meaning of the word " discharge " in con- 
tract law? 

(121) What is the most obvious method of discharge? 

(122) A agrees to sell B potatoes on 90 days' credit. B accepts. 
When the time for delivery comes A tenders the potatoes and 

a 



98 BUSINESS LAW 

demands cash. B refuses to accept on those terms and sues A 
for his loss of profits. Can B recover? Why? 

(123) Discuss Example 58. 

(124) A agrees to work for B for one year. B dies within a 
month and B's business is closed to be wound up. A sues B's 
estate for breach of contract. Can he recover? Why? 

(125) A agrees to manufacture for B 1000 spark plugs of a 
certain design and kind. A has a strike which makes it im- 
possible for him to comply. B sues A. Has A a defense ? 

(126) Name other modes of discharge. 

(127) B owes debt of $10,000. He has assets worth $5000. 
His creditors are X, Y and Z. X has a mortgage on B's home. 
Y and Z have no security. B files a petition in bankruptcy 
under the Federal Bankruptcy Law of 1898. How much in that 
proceeding can Y and Z collect (not in exact figures but general 
explanation) ? Will X be affected by the proceeding ? What 
must B do afterwards to prevent Y and Z suing him for the 
balance? Can Y and Z under any circumstances defeat the 
discharge of B's debts? 

(128) Who is the trustee in bankruptcy? 

(129) What two kinds of bankruptcy proceedings are there? 

(130) Describe the purpose of the Statute of Limitations. 



PART III 
PRINCIPAL AND AGENT 

CHAPTER XVI 
DEFINITIONS AND EXPLANATIONS 

GENERAL PRINCIPLES 

One may act through another. A person may do an 
act personally, or through another whom he has ap- 
pointed to do it. In either case it is by logic and by law 
the first person's act. He is therefore held responsible. 
The act is deemed to be his and not the act of the person 
through whom he does it (except in the case of torts 
and crimes, in which every participator, principal or 
agent, is held to answer). 

Example 64. B appoints A to buy goods for 
him, pledging B's credit therefor. A, pursuant 
to instruction, buys the goods in B's name. 
The act is B's act. He can be sued for the price 
and A cannot be sued. 

Agent: a person under another's authority. One 

may in one sense do work for another and yet not be 
that other's agent. Thus I may order a tailor to make 
me a suit of clothes. He is not my agent or my servant. 
He is simply one with whom I have a contract and is no 
more my agent or servant than I am his. He, therefore, 
may hire employees and he may send a man to the whole- 

99 



IOO BUSINESS LAW 

sale cloth dealer to buy cloth for him and in his name 
with which to make the suit of clothes. The employee 
is an agent or servant of the tailor. The representative 
sent to buy the cloth is an agent of the tailor. They 
work for the tailor. Their time is at his disposal, or at 
least, they are subject to his instructions and authority. 
They are under him. We see, therefore, the nature of 
agency. The agent is working for the principal — 
representing him. The tailor merely contracts with 
me for results. He in no way purports to work for me 
or to represent me. 

We may think of an agent as a delegate. If a dele- 
gate is chosen to go to some assembly, he goes as a rep- 
resentative of others. He acts for his constituency. 
An agent or servant is one to whom duty has been 
delegated. 

Maxims governing subject. Two legal maxims often 
made use of to describe the relation of principal and agent 
or master and servant are : " qui facit per alium qui 
facit per se " (he acts, himself, who acts through another) ; 
and " respondeat superior " (let the superior answer). 

Difference between agent and servant. The person 
who works for another in the sense we have just men- 
tioned, that is, the person who puts his services at the 
disposition of another, may be either agent or servant. 
An agent is one whose work for another involves au- 
thority to represent the other with other persons in 
contractual transactions; a servant is one whose work 
for another does not involve such authority. When we 
speak of an agent, we call his employer a principal; 
when we speak of a servant, we call his employer a 
master. 



DEFINITIONS AND EXPLANATIONS IOI 

Example 65. B employs A and S to work for 
him. He instructs A that it will be A's duty to 
sell goods and collect money. S's duty will 
be that of acting as B's chauffeur. A is an 
agent ; S, a servant. 

From the illustration we may see that while the con- 
sequences of one appointment are quite different from 
those of the other, the relationship between employer 
and employed is basically the same in both cases. Each 
is employed to work for B, and it happens that A's 
work requires him to deal with others on B's behalf. 
S's work does not require this. A's duty is to make 
contracts ; S's duty does not require him to make con- 
tracts. But both are employees. Both occupy the 
same legal relation toward B, but their work is of a 
different nature. Because of the difference in nature of 
the work, important results arise. A has the power to 
bind B upon contracts with third persons ; S has no such 
power. But it is readily seen that the same employee 
may be at times an agent and at times a servant. The 
agent to sell and collect may have to take care of the 
goods or store ; the chauffeur may be empowered to rent 
garage space, buy gasoline and oil, contract for repairs. 
This shows how the work of an agent and of a servant is 
essentially the same ; it is only in the consequences that 
agency and service differ. But those consequences are 
very important. On account of those consequences we 
have the contractual rights of third persons involved 
in agency ; the obligation of the third person toward the 
principal. Between master and servant we have no such 
rights involved. The only way in which a third person 
may be affected in this case is by the torts of the servant 
— to what extent is the master responsible therefor ? 



102 BUSINESS LAW 



DIFFERENT KINDS OF AGENTS 

General and special agents. Agents are called general 
agents by the courts when their authority is of a general 
continuing sort involving a line of action; they are 
called special when they are given a specific thing to do, 
their authority ceasing with its performance. 

Example 66. B employs A to take charge 
of B's office as manager. He employs C to collect 
a debt owing by M. A is general agent ; C is a 
special agent. The difference between the two 
agencies lies in the fact that the authority by im- 
plication or by appearance is much greater in the 
first case than in the second. A general agent is 
necessarily given considerable apparent and im- 
plied authority. Having general charge of a line 
of business he may be supposed to have all the 
authority that usually goes with such appoint- 
ment. A special agent's powers are very 
narrow. He can only do that particular thing 
he is appointed to do. Perhaps A could extend 
credit, compromise debts, extend time of pay- 
ment (depending on all the circumstances) with- 
out having been actually told he could do these 
specific things, for they might all be compre- 
hended by implication, or at least apparently 
to third persons, within and from his general 
appointment. But C could collect only. He 
could not grant extension or do any other thing 
than the particular power given. And the 
debtor should be sure that C has the power he 
claims to have. He should demand a letter 
from B showing C's right. 

Professional agents. Professional agents are those 
who represent various principals in some particular 
line of action professionally, as lawyers, brokers and 
factors. 

A lawyer is one who professes to be skilled in the 
practice of representing those who employ him in matters 
involving lawsuits or particular knowledge of law. 



DEFINITIONS AND EXPLANATIONS 103 

A broker is one who gives his services to bring buyers 
and sellers together. He does not usually have any 
possession of the property for the sale or purchase of 
which he is agent. His authority is generally a ques- 
tion of fact in each case for he often does not have any 
authority to make terms, but what his real authority is 
depends upon the facts. A broker usually works upon 
a commission. There are many classes of brokers, the 
most important of which are the real estate brokers, 
stock brokers and merchandise brokers. Merchandise 
brokers are usually brokers in some particular line, as 
sugar brokers, cotton brokers and the like. 

A factor is an agent who represents buyers and sellers 
who may choose to employ him, and differs from a 
broker largely in the fact that he takes possession of 
the property sold by him and often contracts in his 
own name, his principal being undisclosed. On account 
of the fact that he is in possession of the property and 
may deal with it as his own, his authority is quite ex- 
tensive. The customs of business recognize that his 
authority is large. One may deal with him as having 
authority to sell goods in his possession much as if he were 
the owner of those goods, except that he must conform 
to usual customs in making terms and granting credit. 

WHO MAY BE PRINCIPAL OR AGENT 

Who may be principal. Whether one may appoint 
an agent to do an act depends upon his ability to do the 
thing in person. If he has the legal power to do an act, 
he may appoint an agent to do it for him. 

Who may be agent. Any one who has enough in- 
telligence to carry communication between his prin- 



104 BUSINESS LAW 

cipal and the third person may be an agent. It is not 
necessary that he have the power to do the act himself. 
Thus married women, who at common law could not 
contract at all, could act as agents. It is a very common 
thing for a person under age to act as agent. He can 
quit his place at any time without liability, but acts done 
by him while he acts as agent, are just as effective in 
binding his principal as though he were of age. 

Questions and Problems 

(131) B entered into a contract with A, a merchant tailor, 
by which A was to make a suit of clothes for B. A employed M, 
a journeyman tailor, to work in his shop for eight hours a day 
and put him at the task of making B's suit. B upon ordering 
the suit paid A $25 as part payment. A gave $10 of this to M 
to take to X, a merchant, for the purchase of some cloth with 
which to make the suit. M got the cloth on A's credit and 
secretly pocketed the money. When the suit was finished and 
before B accepted it, A sold it to Z, and refused to make B an- 
other suit or refund his money. B brings suit against Z to re- 
cover the clothes. He also has embezzlement proceedings in- 
stituted against A. X sues A for the price of the cloth bought 
by M. How will these cases terminate? Why? Is A B's 
agent or servant? Is M an agent or servant? Discuss fully. 

(132) Why is a difference made in the cases between a general 
agent and a special agent? 

(133) Name some special classes of agents. Define a broker. 
Name some kinds. Define a factor and state his authority. 

(134) Who may be principal ? Who agent ? 



CHAPTER XVII 
THE AGENT'S AUTHORITY IN CONTRACT 

ACTUAL AND APPARENT AUTHORITY 

Power of agent to bind principal must be traced back 
to something said or done by principal. A person 
claiming to be an agent cannot bind any other person 
for whom he purports to act unless authority has either 
been actually or apparently conferred upon the agent 
by something said or done by the alleged principal. 
This underlying rule must always be borne in mind. 
We must remember that the basis of the agent's power 
to bind another person must consist in that other per- 
son's words or acts. Those other words or acts may 
either actually give authority or seem to do so. One 
who seeks to hold an alleged principal upon a contract 
made by one who is claimed to have been that alleged 
principal's agent must show that the principal (i) actu- 
ally conferred the authority to do the act; or (2) did 
or said something from which the agent apparently had 
the power to do the act in question. 

Example 67. A makes a contract by which 
he purports to bind B to sell certain goods to 
C. C calls upon B to perform the contract. 
B denies that A had the authority to make such 
a contract. The burden is upon C to show that 
B actually gave A the authority to sell such goods 
to C, or to show that B had said or done some- 

105 



106 BUSINESS LAW 

thing from which C had the right as a reason- 
able man to believe, and from which C did be- 
lieve, that A had the authority to do the act in 
question. 

The reason for this rule is very clear. Suppose that 
M establishes a dry goods store and employs A to go 
about collecting debts and does not employ B at all. 
A goes about in the community borrowing money and 
stating that M will repay. After collecting a con- 
siderable sum, he absconds. B also goes about claiming 
to have authority to collect debts. He, also, absconds 
with what he is able to collect. Now it would be not 
only manifest injustice to make M responsible for the 
acts of these persons in pretending to represent him, 
but would make all fortunes precarious. Any person 
by merely claiming to be an agent, or any agent by act- 
ing in excess of his power, would be able to ruin any other 
person for whom he pretended to act. And the prin- 
ciple not only applies to cases of intended wrongs. It 
applies also to acts in excess of authority honestly done. 
As where in the case supposed A borrows money and 
then loses it, or offers it to M and M will not accept it. 

If, then, we will remember throughout this discussion 
of the subject of agency that the power of an agent to 
represent another in the performance of a contractual 
act depends on something said or done by the principal 
as the basis for that which the agent says, or does, our 
conception of the subject will be clear. 

Apparent authority. The third person need only 
rely upon apparent authority, no matter what the real 
authority is, but we must not understand this to mean 
that the apparent authority is necessarily any different 
from the real authority. In cases of special agents the 



THE AGENT'S AUTHORITY IN CONTRACT 107 

real authority and the apparent authority usually coin- 
cide. Even in broader agencies, where the agent has 
to be given a good deal of discretion, the real authority 
and the apparent authority may be the same. If I 
put a man in charge of my office, I not only give him 
apparent authority to do a great number of acts in- 
cidental to the management which I do not and could 
not specifically mention, but by implication I give him 
actual authority to do those things. I might, however, 
secretly limit his real authority. I might put him be- 
hind a counter and yet instruct him to receive no money. 
Here his apparent authority would be wider than that 
of his real authority and his receipt of money for goods 
sold over the counter would constitute payment by the 
customer whether he ever gave me the money or not, 
for he acts in the exercise of the authority which by 
my act I have apparently conferred upon him. It is 
still traceable back to what I have done by which I have 
given him apparent power. The same could be true 
of a special agency, as, for instance, if I should write 
a letter giving A the power to collect a certain debt for 
me and then orally instruct him not to use the letter 
until I notified him further. 

Authority in general and special agencies. We have 
already said something upon this subject. But some- 
thing further remains to be said. In the general agency 
we find much that must be implied and therefore in 
any particular case is to be considered as apparent to 
the third person even where it has been in that case 
secretly forbidden. We therefore say that the more 
general the agency, the greater the appearance of au- 
thority while in the special agency there is little ap- 



108 BUSINESS LAW 

parent authority. But, after all, the test is simply 
this : From what the principal has apparently said or 
done what power has the agent? If he has given him 
charge of a line of action, he has apparently clothed 
him with that which would usually be implied under 
those circumstances. If he has appointed him to do 
a particular act, he has not apparently clothed him with 
much that is in addition to that specifically set forth. 

A general agent is not one merely because he is called 
such. It depends upon the power actually conferred. 
In one case a person leaving a state gave another the 
authority to collect debts, stating in a general way that 
the man was his general agent to transact business 
within the state. The court held that the authority 
of the agent was limited to the collection of debts. A 
special agent is still such although he acts repeatedly 
if for each act he must have special authority. 

APPARENT AND IMPLIED AUTHORITY 

Apparent authority to sell personal property. Whether 
an agent has apparent power to sell personal property 
belonging to his principal depends upon the power 
which the principal has given him to deal with personal 
property. Mere possession of personal property does 
not give the agent ostensible power to sell it. 

Example 68. B has a delivery wagon which 
he desires to have fixed. He sends it to the 
wagon maker for that purpose. The wagon 
maker has no apparent power to sell it from the 
mere fact that B gives him possession. 

Example 69. B employs A as a traveling 
salesman, providing him with a sample case and 
samples. A sells them. The purchaser will 
not get a good title and B can take his property. 



THE AGENT'S AUTHORITY IN CONTRACT 109 

The same rule governs even in cases where the bailee 
is a second-hand dealer in goods of the kind in question. 

Example 70. B has a watch which he takes 
to A, a watchmaker, for repairs. A, who deals 
in new and second-hand watches, sells B's watch 
to a customer. B can obtain the watch from 
the customer, who must look to A for a return of 
his money. 

These illustrations show that an agent will not have 
apparent authority to sell personal property from the 
mere fact that he has possession. But any person put 
in a position from which a reasonable man would imply 
a power to sell can convey title to one relying on the 
appearance, even if his power was secretly limited by the 
principal. 

Apparent authority to collect. The authority to col- 
lect money is an authority not readily implied. A 
debtor could not usually rely upon a payment made to 
an alleged agent unless that agent had the specifically 
expressed authority to make the collection in question. 
It has been said that in cases of sales of personal property 
an agent will have apparent authority to collect in two 
classes of circumstances : (1) where he, himself, sells 
the goods and is empowered to make delivery thereof, 
and (2) where though he does not sell and make de- 
livery, he is " behind the counter," that is to say, placed 
in a position in which it would reasonably appear that 
it was meant for him to collect money. 

Apparent authority to warrant goods sold. This is a 
question which has caused difference of opinion. The 
better view possibly is that any agent having power to 
sell goods has apparently the power to make the usual 
warranties on behalf of the principal. 



110 BUSINESS LAW 

Apparent authority to buy goods on credit. If one 

has authority to buy goods, may the other party assume 
that he can buy on credit? This would depend alto- 
gether upon the circumstances and the terms of the 
appointment. One authorized to buy goods and not 
supplied with cash for buying them would have inferen- 
tially the power to buy on credit. Even if supplied 
with cash and told not to buy on credit, he might still 
have that power if the principal allowed him to seem to 
have such power from his way of carrying on business 
on the terms of his authority. 

Apparent authority to sell on credit. This depends 
altogether upon the circumstances of the case involved. 
This much can be said, that from the mere authority 
to sell, there could be no inference justly drawn that 
there was the power to sell on credit. But, after all, the 
third person buying on credit would run little risk, as 
not having paid for the goods, the question would usually 
be from his standpoint, merely whether he could insist 
on the period of credit. 

Apparent power to borrow money. The apparent 
power to borrow money is very limited. The courts 
say that the power to borrow money, being the most 
dangerous power an agent can possess, will not be 
implied, unless it is absolutely essential to the execu- 
tion of the express purposes of the agency. But it 
is a difficult thing to find cases in the law books in which 
the court has found such implied power to exist. One 
is never safe in lending money to an agent upon the 
credit and for the use of the principal unless he has the 
word of the principal for it that the agent has the power. 
Of course if the principal receives the money or the 



THE AGENT'S AUTHORITY IN CONTRACT ill 

benefit of it from the agent, he will be liable upon the 
theory of ratification, hereafter discussed. 

Apparent power of agent to give, indorse, accept or 
receive negotiable paper. The power of the agent so 
to act depends altogether upon the power expressly 
conferred upon him so to act or to do those things which 
by implication require the making or taking of negotiable 
paper as a reasonable means of carrying out the other 
power. For instance, an agent empowered to borrow 
money would have the implied power to give the usual 
evidences of the debt ; an agent empowered to buy goods 
would have the power to accept a draft upon his prin- 
cipal for the purchase price. 

Questions and Problems 

(135) M claims that P is liable upon a contract made by A 
in P's name. What must M show? 

(136) P conferred upon A power to manage P's real estate 
and execute deeds and mortgages and the necessary notes to 
accompany the mortgages and pay taxes " and generally to act 
in the premises as fully as I may act personally." A borrowed 
money from M in P's name for the purpose of paying taxes. 
He used the money for himself. M sues P. Can M recover? 
(William v. Dugan, 217 Mass. 256, L. R. A., 1916, C no.) 

(137) A, an agent to solicit advertising and collect accounts, 
collected notes payable to his principal and had them cashed at 
the T Bank, and absconded. P sues the bank. Can he recover? 
(Dispatch Printing Co. v. Nat. Bank of Commerce, 109 Minn. 440.) 

(138) A takes a book to B, a second-hand book dealer, and 
asks a price. B says that he will examine it and notify A what 
he will give him. A leaves the book and B thereupon sells to 
C, an innocent purchaser. A sues C for the book. C claims 
that by leaving the book with B, A gave him apparent ownership 
or power to sell it. What result? 

(139) What is a general agent? A special agent? 



CHAPTER XVIII 
RATIFICATION; UNDISCLOSED AGENCY 

RATIFICATION 

Ratification defined. Suppose that one in acting as 
agent for another has no authority or exceeds his actual 
or apparent authority; yet, nevertheless, the putative 
principal, hearing of the act and understanding its 
nature, affirms what has been done in his behalf either 
by his conduct in receiving the benefits, not disclaiming 
when justice would require him to do so, or expressly 
stating that he affirms the act. Clearly in that case the 
lack of previous authority is supplied by the subsequent 
affirmation. The act of supplying previous authority 
is called ratification. 

Act must have been done ostensibly as agent. A 
person will not be held responsible by ratification un- 
less the act was done apparently for him. 

Example 71. C sells goods to A who buys 
in his own name. B afterwards agrees with A 
to take the goods and does take them and gets 
the benefit of the contract. C sues B on the 
theory that B has taken the benefit of A's con- 
tract. B is not liable to C. Had A really had 
power to buy for B, C could have held B as 
undisclosed principal, for there would have been 
a real agency at the time of the act. Ratifica- 
tion implies a lack of authority. If there is 
authority, we do not need to rely on ratifica- 
tion. 



RATIFICATION; UNDISCLOSED AGENCY 113 

Ratification by word or act. A person may ratify 
the agent's act by expressly asserting that he will be 
responsible or by act. Receipt of benefit is the most 
frequent manner of ratification. One cannot enjoy the 
benefit of a contract made nominally in his behalf and 
still disclaim liability thereupon. 

Example 72. P accepts goods bought by A 
as P's agent from B. A had no authority. B 
sues P. P is bound, although in words he may 
repudiate what A has done for him. 

Ratification must be of whole of act. The principal 
cannot ratify a part of the act and not the rest. He 
must take the act with its burdens as well as its benefits. 
Therefore, if he ratifies part, he will be deemed to have 
ratified the entire act. 

Example 73. A, without authority, sells 
and delivers coal as B's agent and servant. 
In the delivery he negligently breaks a window. 
B learning of A's act sends the customer a bill, 
at the time knowing of the tort. He is re- 
sponsible for the broken window. He must take 
the act in its entirety or repudiate it altogether. 

UNDISCLOSED AGENCY 

If an agent, in the execution of the act which he is 
authorized to perform, does not disclose the fact or the 
identity of his principal, the principal may, if he becomes 
afterwards disclosed, be held upon the theory that he 
is the real party in interest — the real contracting party. 
There are some exceptions to this rule that a disclosed 
principal may be held if the third party chooses to hold 
him. The two most important are that he cannot be 
held upon commercial paper made and executed by the 
agent as principal, and that the right of the third person 



114 BUSINESS LAW 

to hold the principal is subject to the state of accounts 
between the principal and agent at the time the third 
person elects to hold the formerly undisclosed, but now 
known, principal. 

As the undisclosed principal may be held so may an 
undisclosed principal elect to hold the third person, but 
this rule is also subject to exceptions, the three most 
important of which are : (i) the exception based upon 
the rule of negotiable paper that no one can be held 
thereupon except a party thereto ; (2) the state of 
accounts between principal and agent; and (3) the 
rule of contract law that one person cannot be made a 
party to a contract with a person with whom he has not 
chosen to contract. The undisclosed principal may sue 
the third person therefore only in respect to those rights 
which the agent could have assigned to the principal 
without the consent of the third person. 

Questions and Problems 

(140) Define ratification. 

(141) What is essential to ratification? 

(142) A gives B power to borrow money for A. B in order 
to get the money mortgages A's personal property to C. A, know- 
ing of the facts, takes and uses the money. C attempts to en- 
force the mortgage but A attacks its validity on the ground that 
B had no authority to make it. Will he win? Why? 

(143) Who is an " undisclosed principal "? May he be sued 
if discovered? Why? May he disclose himself and sue the 
other party to the contract ? 



CHAPTER XIX 

THE PRINCIPAL'S LIABILITY FOR THE AGENT'S OR 
SERVANT'S TORTS 

Principal responsible for agent's torts. It is a well- 
established rule of law which is the foundation of a 
very large percentage of our lawsuits to-day that a 
principal or master is liable for those torts of the agent 
or servant which are committed within the scope of 
the employment, although committed, as is usually the 
case, without the consent and against the wishes of 
the employer. The reader has undoubtedly observed 
or known of cases in which this rule has been applied. 
For example, it is a familiar occurrence in our law courts 
to have a successful suit for damages against a street 
car company arising out of the negligence of an employee 
in operating a street car. And not only for torts of 
negligence, but for all classes of torts, a master or prin- 
cipal is liable, provided they are committed within the 
scope of the employment, that is, can justly be said to 
be a part of the act done. And the reason is that as the 
authorized act of the agent or servant is deemed in law 
to be the act of the principal or master, he must as- 
sume the responsibility for the manner in which it is 
done, for, in the person of his agent or servant he, him- 
self, is deemed to be there doing the act. 

When tort is within the scope of employment. The 
employer is not liable for all of the torts of his agent or 

115 



Il6 BUSINESS LAW 

servant. For what torts is he liable? Clearly they 
must be associated with the service. They must con- 
stitute a part of the act done for the employer. The 
servant or agent at the time he commits the tort must 
be " about his master's business." The tort com- 
plained of may be no part of the act done in behalf of 
the employer for one of three reasons : 

(i) Because the agent or servant is not at the time 
on duty. 

(2) Because the tort of the agent or servant, though 
committed while on duty, cannot be properly considered 
a part of the act done for the master. 

(3) Because the agent or servant although supposed to 
be on duty has made a departure for a purpose of his own. 

Let us consider each of these. 

The agent or servant not on duty at time he commits 
tort. I cannot hold a person for the tort of another 
merely because that other is an employer of the person 
sought to be held. 

Example 74. A is employed by the B Com- 
pany. He is guilty of negligence while going 
home from work, whereby C is injured. Clearly 
the B Company has no responsibility for this 
act. 

When is tort committed while on duty to be con- 
sidered within scope of employment or of authority? 

This is a question sometimes difficult to answer. In 
other cases the answer is very simple. The most 
numerous torts for which masters are sought to be held 
liable by third persons are those of negligence. When- 
ever a servant does his work negligently, whereby a 
third person is injured, the principal is responsible if 
the third person was not also negligent at the time. 



PRINCIPAL'S LIABILITY FOR AGENT'S TORTS 117 

Example 75. A, motorman for the B Rail- 
way Co., negligently drives his car into a vehicle 
driven by C and injures the vehicle and C. 
C can have his damages unless C was negligent 
and his negligence contributed to the injury. 

If the tort is a willful tort, it becomes more difficult 
to identify it as within the scope of the act. Clearly 
it must in some way be a furtherance of the act done 
for the master or principal. 

Example 76. A bricklayer, employed by B, 
while on duty hurls a brick at and strikes C, a 
passer-by against whom he holds enmity. B 
is not liable. The tort cannot be considered in 
any way as part of the act done. 

If the tort can reasonably be considered a part of the 
act authorized to be done, no matter how far its manner 
of performance may be from the desires of the master 
or principal, the master or principal is liable for damages 
arising out of the injuries thereby caused to third persons. 

Example 77. A is a detective for the B De- 
partment Store. Suspecting that C has been 
guilty of shoplifting, he has her arrested. C 
is really innocent and the charge fails. A also 
had no reasonable grounds justifying his belief. 
The store is liable for damages to C. 

Example 78. In the same case, assume 
that a window washer makes the arrest. The 
store would not be liable as the act would clearly 
be outside the scope of his employment. 

Example 79. B employs A to sell goods. A 
in making the sale makes fraudulent represen- 
tations. B is liable for the damages thereby 
caused the purchaser. 

We see, therefore, that whether a tort is within the 
scope of the servant's duty or of the agent's authority 
depends upon its part in the act which is done for the 
employer. 



1x8 BUSINESS LAW 

Where servant makes departure for a purpose of 
his own. If a servant, although within his hours of 
service, departs from the work for a purpose of his own, 
or, as one judge has said, goes upon " a frolic of his 
own," the master will not be liable in cases in which 
he would have been liable had there been no such de- 
parture, but merely going a longer way around while 
engaged upon the master's business when the tort is 
committed will not excuse the master. 

Questions and Problems 

(144) If a servant or agent commits a tort without his em- 
ployer's consent, is the employer liable? When? Why? 

(145) State Example 74. Why is the master not liable 
in that case? 

(146) A left home with the intention of going to R's store to 
trade. Before she entered the store and while she was stand- 
ing looking into a shop window, a detective employed by the 
company caused her arrest, accusing her of shoplifting. Is R 
liable? (Vrohotka v. Rothschild, 100 111. Ap. 268.) 

(147) A is agent for the P Insurance Co. with authority to 
suspend, check up, and settle with, the local agents of the com- 
pany. B, one of such local agents, was deemed to be in default. 
A attempted in various ways to induce B to settle up and finally 
had him indicted for embezzlement, a crime for which he was 
found not guilty. Assuming that A acted without reasonable 
grounds, is P liable? (Russell v. Palatine Ins. Co., Miss. 31, 
L. R. A. N. S. 470.) 

(148) A is P's chauffeur and it is his duty to care for his 
master's automobile and drive his master day or night when 
called upon. On a certain evening he takes the car out to give 
a friend of his a ride. He drives negligently and runs over and 
injures M, who is crossing the street. Is P liable to M for damages ? 



CHAPTER XX 

THE AGENT OR SERVANT'S LIABILITY TO THIRD 
PERSONS 

Liability in contract. The agent is not liable to third 
persons upon contracts he makes as agent with such 
third persons if he acts within the scope of his authority 
and contracts in his principal's name. 

Example 80. P appoints A to contract with 
C for the sale to C of an automobile. A, pur- 
suant to the authority and in P's name, makes 
the contract. P afterwards wrongfully refuses 
to deliver the car. The contract is between P 
and C. A was a mere intermediary. He has 
no liability upon the contract. 

Agent liable where he misrepresents authority. If 

an agent by means of misrepresenting his authority 
exceeds it and makes a contract in his principal's name 
upon which the principal is not liable and which the 
principal does not ratify, the agent is liable on the 
theory that he warrants his authority. But this rule 
does not apply where the third person knows as much 
about the authority as the agent does, for in that case 
he should know as well as the agent should that the 
contract is in excess of authority. 

Example 81. P gives A authority to pur- 
chase goods with cash supplied to A for that 
purpose. A does not have sufficient funds to 
119 



120 BUSINESS LAW 

purchase certain goods which he believes his 
principal would like to have, and he borrows 
money in his principal's name for this purpose. 
The lender does not inspect A's authority and 
merely takes A's word for it. P refuses to 
ratify A's act and repudiates it as being without 
authority. A is then sued. He can be held. 
Had C known what A's authority was, he 
could not hold A as he could not then have re- 
lied upon the assertion. 



Agent liable when principal undisclosed. If an agent 
does not disclose his principal when he makes a contract, 
the agent is liable upon the contract although he did 
in fact have full power to bind the principal had he 
chosen to do so. The reason is obvious. If C contracts 
with A, it would be forcing C into a contract with a 
person with whom he might not have cared to contract 
if A afterwards could divest himself of obligation by 
asserting that he was in reality an agent and therefore 
ought not to be held. 

If a third person upon discovering the identity of 
the real party in interest chooses to hold him, as the law 
gives him the right to do, then after such election is 
made, the agent's liability ceases. 

Agent's liability when agent contracts in his own 
name. Even if the principal is known, there is no law 
preventing an agent from making a contract in his own 
name even if he has authority to bind the principal. 
The third person may not care to take the principal's 
credit, or the agent may carelessly or for some good 
reason have himself made a party to the contract as 
principal, though he is in fact agent. An agent who 
desires to bind his principal should, in making a written 
contract, be careful to describe his principal as the con- 



AGENT'S LIABILITY TO THIRD PERSONS 1 21 

tracting party and should sign his principal's name by 
himself as his agent, thus : 

James Sprague 
by 

Walter T. Jones, Agent. 
And in the body of the contract James Sprague should 
appear as the contracting party. 

Liability in tort. All who participate in the com- 
mission of a tort are liable. An agent or servant who 
commits a tort is for this reason liable, therefore, whether 
it is committed within the scope of his authority or em- 
ployment or not. If within the scope of his authority 
the principal will also be liable, but this will not excuse 
the agent or servant for being the participant in the 
commission of a tort. In practice where there is a 
financially responsible principal or master, the agent or 
servant's liability is frequently ignored. One who has 
a claim in tort against a railroad company does not, 
in the majority of cases, assert it against the employee. 
But this is for practical and not legal reasons. 

Questions and Problems 

(149) P employs A as salesman. A warrants the goods sold. 
They turn out defective. The purchaser sues A. A acted within 
the scope of his authority and in P's name. Is A liable in a suit 
by the purchaser ? Why ? 

(150) Suppose in the case above, the agent did not have 
authority to warrant, but by the fact of making the warranty 
represented that he had. Is he liable? Why? 

(151) What is the liability of an agent of an undisclosed 
principal? What may the third person do whereby he loses his 
right against the agent ? 

(152) John Smith, having authority to buy goods for Henry 
Jones from Peter Moore, which fact is known to the seller, buys 



122 BUSINESS LAW 

the goods in his own name, giving his own note. Is the agent 
liable? 

(153) Give the proper way for an agent to sign a contract 
when he desires to bind his principal. 

(164) If an agent, acting in behalf of his master, commits a 
tort, is the agent liable? Why? 



CHAPTER XXI 

MUTUAL RIGHTS AND OBLIGATIONS OF PRIN- 
CIPALS, AGENTS AND SERVANTS 

DUTY OF GOOD FAITH 

In general. The relationship of the Principal and 
Agent and of Master and Servant is one of highest 
trust and confidence. Each must exercise towards the 
other the greatest degree of good faith in mutual deal- 
ings. Some applications of this doctrine are made 
below. 

Agent as buyer from or seller to principal. If an agent 
is appointed to sell goods he must not sell to himself 
without the consent and knowledge of the principal. 
If he is appointed to buy for his principal he must not 
sell from himself unless the principal consents. The 
reason is that one who sells will be tempted to buy as 
cheaply as he can. Now one who appoints an agent to 
buy or sell for him is entitled to believe that that agent 
is buying as cheaply and as well for him as he would 
himself if acting personally, and that one who sells 
shall sell as dearly and well as he himself would person- 
ally. If the agent interposes himself as that buyer or 
seller, unknown to the principal, there is temptation to 
betray the trust. It may not actually be betrayed, but 
the law will not inquire of this, but forbids the tempta- 
tion itself. 

123 



124 BUSINESS LAW 

Example 82. P appoints A to sell real prop- 
erty. A without P's knowledge buys the prop- 
erty, representing that he has sold to C. P 
afterwards discovers the true facts, tenders 
back the purchase price and asks to have the 
sale set aside. He will prevail and it is not 
necessary for him to show that A actually 
bought for less than he might have obtained. 

Contracts between principal and agent. An agent 
may properly buy from or sell to his principal or make 
any other contract concerning the subject matter of 
the agency if he has the principal's consent and provided 
further he discloses every material fact. Strangers 
deal " at arm's length " and are each on guard, but as a 
principal is disarmed when he deals with his agent, he 
may expect the fullest disclosure of every material fact. 

LIABILITY OF MASTER FOR INJURIES TO SERVANT 

Common law liability. A master was bound by the 
common law to provide his servant with a safe place 
to work, to exercise care toward him for his personal 
safety and to use reasonable care in the selection of 
competent fellow servants. But a servant had no case 
against the master (i) where the injury was not due to 
some carelessness on the part of the master ; (2) where 
the injury was caused by the negligence of a fellow 
servant where the master had exercised reasonable care 
in the selection of that fellow servant; (3) where the 
injury was caused by the usual risks incident to that 
kind of employment ; and (4) where the injury resulted 
from the servant's own negligence, even if the master 
were negligent also. 

Statutory liability; employer's liability and com- 
pensation acts. Acts have recently been passed in 



MUTUAL RIGHTS AND OBLIGATIONS 125 

many states by which employees engaged in hazardous 
work are to be compensated for injuries received while 
on duty, regardless of the negligence of employer or 
employee, or co-employees or assumed risk. These laws 
establish amounts of compensation based upon the ex- 
tent of the injury and the age and earning power of the 
employee. 

Questions and Problems 

(155) W employed J to sell W's property for $3000, reserving 
the right to sell himself if he found a purchaser. W entered 
into negotiations with one H for the sale of the property for 
$3300, but H learned that the property was offered for $3000 
by J, whereupon he dropped his negotiations with W and dealt 
with J. J, by a roundabout method, sold to H. W now sues for 
$100 commission retained by J, on the ground of breach of faith. 
Can W recover? (James v. Williams, Neb. 20 L. R. A. 207.) 

(156) A employed B to purchase property for her for $5000. 
B negotiated with the owner and found he could purchase for 
$4500. B thereupon bought it himself. A, learning of this, 
brings suit to have the court declare the property to be hers. 
Will she prevail ? Why ? 

(157) D was manager of a theater for H. H had a ten-year 
lease. Before the lease expired D secretly applied to the owner 
of the building for a renewal of the lease at an increased rental. 
H claims the benefit of this lease. Is he entitled to it ? (Davis 
v. Hamlin, 108 111. 39; Essex Trust Co. v. Enright, 214 Mass. 
507, 47 L. R. A. N. S. 567.) 

(158) What is the liability of the master for the servant's 
injuries under the common law rule and under liability statutes ? 



CHAPTER XXII 
REVOCATION AND TERMINATION OF AGENCY 

REVOCATION 

Right and power to revoke distinguished. An agent's 
authority may be revoked (except in cases noted under 
next heading) regardless of the right to revoke. If 
the right to revoke exists by reason of the wrongdoing 
of the agent, or a reservation of right in the contract, 
or an agency without definite duration, then the power 
to revoke and the right to revoke coincide. But in 
cases where there is no right to revoke, there exists the 
power which, if exercised, would give the wrongfully 
discharged agent a suit for damages. 

Example 83. P employs A for one year as 
his agent, conferring upon him authority for 
certain purposes. One month later P wrong- 
fully discharges A and revokes his authority. 
The authority of the agent is gone and he can- 
not by any means retain it either with or with- 
out court procedure. But he would have a right 
to sue P for damages for the wrongful act. 

Agencies coupled with interest. If an agency is 
" coupled with an interest " it cannot be revoked. An 
agency is coupled with an interest when the agent has a 
sort of lien upon or title in the subject matter of the 
agency. But an agency is not coupled with an interest 
merely because it is profitable to the agent. 

126 



REVOCATION AND TERMINATION OF AGENCY 127 

Example 84. P appoints A as his agent to 
sell real estate. The contract is a very good 
one for A and he is making much profit thereby. 
P can revoke this agency, though it may be 
wrong for him to do so, depending on his con- 
tract. If wrong, A may sue for damages, but 
cannot prevent the revocation. 

Example 85. P borrows money from A and 
as security authorizes A to collect the rents from 
P's property. This agency is coupled with an 
interest and cannot be revoked. Either P or 
A's death will not revoke it. 



TERMINATION OF AGENCIES BY OTHER MEANS 

Termination by lapse of time or exercise of the au- 
thority. When the time has elapsed for which the agent 
has been appointed, or he has carried out his authority, 
obviously his agency ceases. However, agencies are 
frequently for indefinite periods, and notice by agent or 
principal would in that case terminate the agency. 
Where an agency terminates by lapse of time, notice 
to third persons may be desirable, as hereafter explained. 

Termination by insanity or death of principal or agent. 
The death of either principal or agent will terminate 
the agency, except where coupled with an interest. 
Insanity of either will also operate in the same manner. 

Notice to third persons where agency terminated. 
Where an agent has been in charge of some line for a 
period of time, the cessation of his authority will not 
affect third persons who have not learned thereof, 
where the agent continues to perform acts of apparent 
agency. It is advisable, therefore, to see that notice is 
given to those who have dealt with the agent prior to 
the time his authority ceases. Frequently, his quitting 
is necessarily accompanied by a change in circumstances 



128 BUSINESS LAW 

which would themselves serve notice that he was no 
longer connected with his former principal. 

Questions and Problems 

(159) Is there a power to revoke an agency when there is 
no right to revoke? Why? 

(160) When is an agency coupled with an interest? State 
Example 85. 

(161) In what other ways may agency be terminated ? 



PART IV 

SALES OF GOODS 

CHAPTER XXIII 
DEFINITIONS AND EXPLANATIONS 

SALE DEFINED 

" Sales of goods " as a subdivision of law. The law 

of Sales of Goods is that division of law which covers 
those contracts by which one person intends the transfer 
of the ownership of personal property from himself to 
another. The subject is often designated merely by 
the word " Sales," which, when used as a title for a 
subdivision of law, means sales of goods or personal 
property. We also speak, it is true, of the sale of real 
property, and correctly so, but " Sales " as a short title 
of a branch of law is always taken to refer to personal 
property. 

Sale defined. A sale is defined by the Uniform Sales 
Act as "an agreement whereby the seller transfers the 
property in goods to the buyer for a consideration called 
the price." (Uniform Sales Act, Sec. i.) 

It will be observed that the definition implies the 
actual transfer of ownership. There may be a contract 
to make a sale which is never consummated, in which 
the ownership is not transferred ; and such contracts ob- 
viously also belong to the subject of sales. The word 

K I2Q 



130 BUSINESS LAW 

" sale " is thus used in a narrow sense to indicate a 
transaction in which ownership does actually pass, 
and in a broader sense to include also contracts to sell 
which may be for some reason not carried out. 

Title, ownership, property, possession. The words 
" ownership " and " title " in the law of sales are for our 
purposes synonymous. The reader knows from the use 
of the word in common speech what is meant by " own- 
ing " property. The law of sales treats of the transfer 
of this ownership from one person to another. The 
word " title " is often used in the same sense. We 
speak of the title being in A, or passing from A to B. 
But we also use the word " title," and sometimes also 
the word " ownership " to indicate a special right to 
hold property as distinguished from general ownership 
or title as where we say "A's title is that of bailee." 

The word " property " is used synonymously with 
ownership but more usually to describe the thing trans- 
ferred, as where we say, " the horse was A's property." 

SALES DISTINGUISHED FROM OTHER TRANSACTIONS 

Sales and bailments distinguished. When one parts 
with the possession of goods to another under a contract 
it is important to determine whether ownership passes 
to that other with the possession, thereby constituting 
a sale, or whether the deliverer retains his ownership, 
and thereby constitutes the other party a bailee. 

A bailment exists whenever the person who has the 
possession of goods must return to the other the same 
goods as those received by him, either in the same or 
altered form, or disposes of them as the agent of the other 
person. 



DEFINITIONS AND EXPLANATIONS 131 

Example 86. A, a wholesale carriage manu- 
facturer, contracts with B whereby B is to have 
the agency for A's carriages. A sends a lot of 
carriages to B under this arrangement, B to 
have the privilege of returning all that are 
unsold. When about half have been sold, B 
goes into bankruptcy. His trustee in bank- 
ruptcy claims the carriages as belonging to B. 
A claims them as owner. The goods belong to 
A and may be reclaimed by him. (Franklyn v. 
Stoughton Wagon Co., 168 Fed. 857.) 

Example 87. A delivers to B six sheep under 
an agreement whereby B is to return to A the 
same sheep or sheep of equal value. B's credi- 
tors seize the sheep. A starts legal proceedings 
to get possession of the sheep from the creditors. 
A will fail as the title to the sheep passed to B 
when the sheep were delivered to B as B could 
perform his contract by delivering the^same 
sheep or other sheep. (Wilson v. Finney, 13 
Johns (N. Y.) 358.) 

Sales and gifts distinguished. A gift is a transfer of 

personal property gratuitously. A sale is supported by 

a consideration (called a " price"). An agreement to 

make a gift is unenforceable. It lacks the element of 

contract known as consideration. Title passes by gift, 

but the gift must be completed by delivery of the thing 

given. In a sale, title may pass before delivery. 

Example 88. A promises to give his brother 
B his watch but as he does not have it with him 
cannot make the delivery at once. He gives his 
brother C his stick pin by delivering the same 
over to him. When A obtains his watch he 
decides not to deliver it to B. He also desires 
his pin from C. B has no right of any sort 
against A, but C owns the pin. A cannot re- 
claim it. 

THE UNIFORM SALES ACT 

We noticed in an early part of this book the appoint- 
ment of Commissioners on Uniformity of Legislation 



132 BUSINESS LAW 

and their work in drafting certain codes for enactment by 
such states as should deem them desirable contribu- 
tions to their local law. One of the first few subjects 
to which attention was given by the Commissioners 
was the subject of sales. The proposed law was drafted, 
adopted and recommended for passage by the various 
states and was thereafter adopted by a large number of 
them. The law does not seek to make fundamental 
changes in the law of sales, but merely to bring about 
uniformity, certainty, modernity and completeness. 
Necessarily, in some states, its adoption would mean a 
rejection of certain doctrines in cases in which opposing 
views had prevailed in various states, but the law as 
worked out through generations in meeting the condi- 
tions of commerce was not in its basic principles in- 
tended to be changed. 

FORMALITIES REQUIRED LN LAW OF SALES 

We have already noticed in our consideration of the 
general law of contracts that the Statute of Frauds 
makes provision for formalities in the case of sales of 
personal property. A sale may be oral or in writing or 
implied, except for the requirements of this statute 
which has been substantially copied into the Uniform 
Sales Act. We must remember about the provisions 
of the Statute of Frauds that 

(i) The statute does not apply to executed sales ; 

(2) The statute does not apply to sales for a price 
less than an amount named ($50 by the old statute of 
frauds, $500 by the Uniform Sales Act, changed by some 
states to various sums in their adoption of the Sales 
Act); 



DEFINITIONS AND EXPLANATIONS 133 

(3) The statute is satisfied and the sale thus made 
enforceable : 

(a) If there is a written memorandum signed by the 
party sought to be charged ; 

(b) If all or a part of the price is paid ; 

(c) If all or some of the goods are delivered and ac- 
cepted ; 

(4) The fact that the statute is not complied with 
in any sale or contract to sell is no indication that the 
contract will not nevertheless be performed. Honest 
men carry out their bargains, and the statute was passed 
as a protection against the inventors of false testimony. 
Unfortunately, parties who contract sometimes avail 
themselves of the technicalities in cases in which they 
should lose on the merits. 

Questions and Problems 

(162) What is covered by the title " Law of Sales "? 

(163) Define a sale. 

(164) Define " title," " ownership," " property," " posses- 
sion." 

(165) State Example 86. 

(166) State Example 87. 

(167) A is a jeweler and delivers " jeweler's sweepings " to B, 
who is to separate the dross from the quantity and either deliver 
the precious metal to A, less a specified quantity for his services, 
or pay A the value. On the same day that A delivers the metal 
to B it is destroyed by fire. B claims that this discharges his 
obligation. Is he right? Why? 

(168) A promises to give his nephew his horse and a saddle. 
He hands B the saddle, but the horse, not being present, is to be 
delivered later. Later A changes his mind and wants the saddle 
back and refuses to give the horse. Can B keep the saddle ? 
Can he get the horse ? Why ? 

(169) What is the " Uniform Sales Act "? 



134 BUSINESS LAW 

(170) How does the Statute of Frauds affect sales of personal 
property? 

(171) Name two classes of sales to which the Statute of Frauds 
does not apply. 

(172) A buys an automobile, the transaction being entirely 
oral. He pays down $ io on the purchase price, balance to be 
paid when he gets the car. He afterwards refuses to take the car 
and being sued, pleads the Statute of Frauds. Is it a good defense ? 
Why? 



CHAPTER XXIV 
WARRANTIES IN SALES 

DEFINITIONS 

Warranty defined. What more natural than that 
he who desires to sell goods should make exaggerated 
statements as to their merits. The salesman will 
" puff his wares." A seller who makes assertions con- 
cerning his goods does so for the purpose of inducing the 
buyer to buy. Such assertions may become or may not 
become a part of his contract. If they do become a 
part of his contract they are called " warranties." When 
do they thus become a part of his contract ? Not when 
they are in the nature of opinions and predictions ; but 
if they are statements of fact they then are a part of the 
transaction and the seller must make good. A warranty, 
then, we may define as an affirmation of fact made by 
a seller concerning the qualities or title of the goods sold, 
for the purpose of inducing the buyer to buy, and upon 
which the buyer relies. 

Knowledge of facts by seller immaterial. In the 
law of sales an affirmation of fact concerning goods in 
process of sale becomes a part of the contract of the sale 
and may be enforced as such irrespective of the inten- 
tion or knowledge of the seller. He has made an as- 
sertion, therefore let him be held to its truth, for the 
statement is a part of his contract. If I sell a horse and 

135 



136 BUSINESS LAW 

warrant it sound, it is a part of my contract that the 
horse is sound, and whether I knew him to be sound or 
unsound does not alter the fact that it was upon the 
faith of my statement that the buyer buys the horse. 
If the statement is knowingly false, the buyer may at 
his option sue in tort for fraud. 

Opinions and predictions not warranties. It has 
always been the law that a seller may puff his wares. 
He may indulge in " dealers' talk." We expect one who 
sells goods to praise them as the best. If he has no faith 
in his goods, he cannot sell them to others. The auto- 
mobile salesman may admit that there are better cars, 
but none better in the class that this car represents. He 
makes extravagant predictions, his opinions are enthu- 
siastic. One cannot build a warranty out of such en- 
comiums. As in the law of fraud, so here in the law 
of warranty, we must have statement of fact, not mere 
opinion, to constitute an assertion upon which one can 
base a suit for damages. 

Example 89. A being about to sell B a cash 
register states that B can dispense with the 
services of a bookkeeper. B finds that he can- 
not do so. He has no case. 

Example 90. A warrants that a car will go 
a certain number of miles on a gallon of gasoline 
under ■ certain conditions. This is a warranty 
and is a part of the bargain upon which B can 
rely. It is not a statement of opinion but of 
fact. 

EXPEESS WARRANTIES 

Express warranties defined. We have already de- 
fined a warranty. It is called express when it is made 
orally or in writing. 



WARRANTIES IN SALES 137 

Example 91. A offers to sell B a horse. B 
seems willing to buy on A's terms but ex- 
presses doubt as to the animal's soundness. A 
says, " The horse is sound," and B buys. A's 
assertion is an express warranty. (Hobart v. 
Young, 63 Vt. 363.) 

Oral warranties not provable to contradict or add to 
written contracts. Attention is drawn here to the dis- 
cussion of the parol evidence rule on page 84 of this 
book and one of the examples there given in the case of 
a sale. 

No implied warranty where express warranty covers 
same subject matter. An implied warranty may of 
course exist when the contract is in writing or oral. 
Otherwise we could not have such a thing as implied 
warranties. But an implied warranty cannot be shown 
where the parties have in their language covered the 
point. 

THE IMPLIED WARRANTIES 

The implied warranty of title. One who sells goods 
impliedly warrants that he has (or in case of a contract 
to sell that he will have) the ownership of the goods or 
power to dispose of them, that they are unencumbered 
and that he will defend them against all lawful claims. 

This implied warranty is of the utmost importance, 
as a person who buys goods which the seller has no 
ownership in, or right to sell, must yield them to the 
true owner if he appears to demand them. His remedy 
is by suit against his seller. And that suit is based upon 
the theory that the seller of goods impliedly warrants 
title. 

The implied warranties of quality or capacity enu- 
merated. In a contract of sale of personal property 



138 BUSINESS LAW 

there may be one or more of the following implied warran- 
ties of quality or capacity of the goods sold. 

(1) Warranty that goods sold by description will be 
as described. 

(2) Warranty in a sale by sample that the goods shall 
correspond with the sample. 

(3) Warranty in a sale by sample where the seller is 
the manufacturer, that the goods shall be merchantable. 

(4) Warranty of merchantability of goods sold by 
description. 

(5) Warranty that goods purchased for a particular 
purpose known to seller are fit for that purpose. 

No warranties of quality where the very goods sold 
are present at sale and buyer has reasonable oppor- 
tunity of inspection. Where one being neither dealer nor 
manufacturer sells goods to another which are present 
subject to inspection, there is no implied warranty. 
This is the simplest case of a sale and the rule is " Caveat 
emptor " (Let the buyer beware). 

Example 92. A has an automobile which 
he has used several seasons which he wishes to 
sell. He offers it to B for $500. B looks the 
car over and buys it. There are no implied 
warranties of quality in this case. There is of 
course the implied warranty of title. We 
know from our consideration of the law of frauds 
in contracts that A must not be guilty of cover- 
ing up defects known to him so that they will 
not be discoverable by B. Also defects of a 
serious character known to him which B can- 
not discover on reasonable inspection must be 
disclosed by A. 

Implied warranty that goods sold by description will 
be as described. If one purchases goods by descrip- 
tion he is entitled to the very goods which in his contract 



WARRANTIES IN SALES 139 

of purchase he has described. This has been said not 
to be so much a warranty as a mere requirement that 
the contract which one makes be performed as made. 
But it is conveniently treated as a warranty. 

Implied warranty in sale by sample that goods will 
correspond with sample. Goods are frequently sold 
by sample. The purpose of showing the sample is to 
represent the character of the goods to be sold. One 
cannot display a sample of certain quality and thereby 
induce purchase without becoming liable to deliver 
goods of equal quality with the sample. 

When are goods sold by sample ? A sample is usually 
an article which will not constitute a part of the bulk 
delivered, as where a piece of silk is produced to show the 
quality of dress goods offered for sale. A sample may 
be out of the bulk itself and constitute a part thereof 
on delivery. But it is possible that a part of the bulk 
might be taken out for the purpose of enabling the buyer 
to make inspection and without any representation by 
the seller that the goods are like the part produced. 
The circumstance would have to show the intent of the 
parties. (Bierne v. Dord, 5 N. Y. 95.) 

Implied warranty in a sale by sample when seller is 
mamifacturer that the goods shall be merchantable. 
There is a warranty in a sale by sample that the goods 
shall be as good as the sample. There is also a warranty 
in a sale by description that the goods shall be mer- 
chantable. The fact that the sale is by sample ought 
not to make the obligation of a manufacturer to furnish 
good goods any the less stringent. It would not or- 
dinarily be supposed by a buyer from a manufacturer 
that the manufacturer could, by displaying a sample 



140 BUSINESS LAW 

(which might have unknown defects) minimize his 
liability, which would impliedly exist if he had not shown 
the sample. 

Implied warranty of merchantability where goods 
are sold by description. A person buying goods by 
description from a manufacturer or grower buys with 
the object of getting goods without unusual defects, 
or as we say, merchantable. It has been decided in some 
states that this rule applies to a dealer who does not 
manufacture or grow the goods sold, but the Uniform 
Sales Act extends the rule to that case where, from the 
circumstances, it is reasonable to suppose that the buyer 
relied on the judgment of the seller. 

Implied warranty that goods purchased for a particular 

purpose known to the seller shall be fit for that purpose. 

There is an implied warranty of fitness for the particular 

purpose for which the buyer buys, whether the seller 

is manufacturer or grower or not, whenever it is apparent 

that the buyer relied upon the judgment of the seller 

to supply the thing needed. 

Example 93. A has a lumber yard and ap- 
plies to B, who deals in engines, for an engine 
which will do certain work. B undertakes to 
supply an engine for the purpose wanted. The 
engine which he supplies, although a good en- 
gine, will not answer A's purposes. There is a 
breach of warranty. (Marbury v. Stearns, 32 
Ky. Law Rep. 739.) 

No such implied warranty of fitness where buyer 
orders a known, described and definite article. To 

imply the above warranty the buyer must rely upon the 
judgment of the seller. There is no such reliance where 
the buyer orders a " known, described and definite " 
article. 



WARRANTIES IN SALES 141 

Example 94. In the above example, A 
orders " No. 2 Smith Engine " and B supplies 
an engine of that kind, of good material and 
in no way defective. A gets what he bargained 
for and it does not concern B whether it will 
do A's particular work or not. That was A's 
lookout when he used his own judgment to de- 
cide upon the kind of engine he wanted. 



Questions and Problems 

(173) Define a warranty. Is a seller's ignorance material? 

(174) A, about to make a sale to B, says, " If you buy this stock 
it will sell for twice as much within a year." The stock goes 
down. B sues A. Is A liable on the assertion ? 

(175) Distinguish between Example 89 and Example 90, 
explaining why one is a warranty and the other not. 

(176) A, selling a horse to B, says that the horse is sound. 
The horse being unsound, B sues A. A replies that the statement 
was only his opinion. Is he right ? 

(177) A sells a watch to B. The watch has been stolen from 
Y by X, who sold to A. Y claims the watch from B. What 
right has B against A? 

(178) State Example 92. 

(179) If sale is by sample, what warranties are there? 

(180) A orders canned peaches from B, a canner of peaches. 
The peaches spoil on account of some defect in canning. A 
sues B. What warranty shall B claim is broken? Will he win? 

(181) A, having a packing plant, desires a refrigerator which 
will produce a certain degree of refrigeration within a given time 
in a certain room. He applies to B, who manufactures re- 
frigerators, explains his needs and asks B if he cannot supply 
him. B supplies a good refrigerator but it will not do the work 
desired. A thereupon notifies B to take it out and refund his 
money. Has A a good case? 

(182) In the case above, suppose A had ordered a certain 
known and described refrigerator from B, who knew his needs, 
and B had supplied the refrigerator ordered, what warranty or 
warranties would exist, if any ? 



CHAPTER XXV 
TRANSFER OF OWNERSHIP 

Introduction. A contract of sale is for the purpose 
of transferring ownership from one to another. Some- 
times the transaction is one that takes considerable 
time for its performance. There is a certain interval 
of time at which, in that transaction, the title will pass 
from one to the other. We must be able to say at any- 
time whether the goods belong to the buyer or the seller. 
Whether the ownership has passed depends upon the 
intention of the parties. To discover that intention 
certain rules of presumption have been laid down. 
They are not infallible and they are legally rebuttable 
by evidence showing a contrary intention. 

Transfer of ownership may precede, be coterminous 
with or follow change of possession. 

Let us notice these various rules as to transfer of 
ownership. 

Title to ascertained goods cannot pass. As long as 
the particular goods to constitute the subject of the sale 
are not ascertained, the title cannot pass. This is a 
rule of law, not merely a presumption, and cannot be 
overcome by proof of a contrary intent, for it is simply 
impossible to transfer title to goods whose identity has 
not been ascertained. 

Example 95. A and B make a contract by 
which A, a manufacturer of chairs, agrees to 

142 



TRANSFER OF OWNERSHIP 143 

sell B 100 chairs of a certain description. Until 
chairs have been appropriated to the contract, 
title cannot pass. 

Title to ascertained goods passes according to the 
intention of the parties. Whether the goods are as- 
certained at the time of the contract or thereafter ap- 
propriated to the contract, title passes according to the 
intention of the parties. The following rules are framed 
to discover that intention. 

Specific goods — in deliverable state, unconditional 
contract to sell. In this situation, unless a contrary in- 
tention appears, title is presumed to pass when the con- 
tract is made. This is true even if time of payment 
or time of delivery or both are postponed. 

Example 96. A asks B if he will give him 
$25 for a wagon then in A's barn. B replies 
that he will and A says " sold." It is agreed 
that B shall take the wagon away the next day 
and hand A the money within a week. The 
same day the wagon is destroyed by fire without 
A's fault. B must pay for the wagon. It is his. 

Specified goods — seller bound to put them in de- 
liverable shape. In this situation the title is presumed 
not to pass until the thing is done which puts the goods 
in deliverable shape. The presumption will be over- 
come if the contrary intention appears from the facts. 

Example 96 a. In the above case the wagon 
is incomplete and not in a deliverable state and 
A agrees to put it in a deliverable state for B's 
acceptance. Title is presumed not to pass until 
that is done. 

Goods unascertained — goods in a deliverable state 
appropriated to the contract. If this situation ap- 
pears, the title (unless a contrary intention appears) 
is presumed to pass when the appropriation occurs. 



144 BUSINESS LAW 

Goods to be delivered to carrier by seller for ship- 
ment to buyer. In those cases in which the seller is 
by the contract to deliver goods to a carrier for trans- 
mission to the buyer, title is presumed to pass when 
the goods have been by the seller transmitted to the 
carrier for that purpose. 

Example 97. A in New Orleans orders goods 
from B in Chicago to be shipped by B to A. B 
puts the goods in the possession of the carrier. 
They are destroyed en route. The loss is upon 
A as the goods have become his. He may of 
course hold the carrier if the carrier is at fault 
under the law of carriers. 

Same situation except goods shipped " C. O. D." 

The result here is the same. Notwithstanding the 
carrier is to " collect on delivery," the goods belong to 
the buyer upon delivery to the carrier subject to a lien 
to be enforced by the carrier for the benefit of the seller. 

Same situation — shipment by seller to himself as 
consignee. The seller may reserve title in himself by 
the form of the bill of lading. If he ships to himself 
at the point of destination he is said to reserve the jus 
disponendi. Title does not pass at the time of shipment. 
The same result may be accomplished by sending the 
bill of lading, made out either to the shipper or buyer, 
to a bank accompanied with a draft to be paid by the 
buyer before he can get the bill of lading. 

Same situation — goods sent F. O. B. Sometimes 
the letters " F. O. B." (free on board) are used to in- 
dicate the point to which the seller is to pay the freight. 
Where such is the case title is presumed to pass at the 
point at which transportation charges, if any, are to be 
paid by the buyer. 



TRANSFER OF OWNERSHIP 145 

Example 98. The goods in Example 97 are 
to be sent F. O. B. New Orleans. Title will be 
presumed not to pass until they reach New 
Orleans. 

Risk of loss. Upon whom is the risk of loss as be- 
tween buyer and seller? The general rule is that in 
the absence of contract to the contrary the risk of loss 
follows the title. If title has not passed, the risk is 
upon the seller ; if it has, the risk is upon the buyer. 

Example 99. A agrees to sell B a certain 
desk. Before title has passed the desk is de- 
stroyed by fire. The loss is A's. B need not 
pay for the desk. Suppose title had passed, 
but A still had the possession. The loss would 
be B's. His property is destroyed and if he? 
had not yet paid for the desk, he would be 
obliged to do so. 

In cases in which all the circumstances indicate trans- 
fer of ownership, but the seller retains title for purposes 
of security, the risk of loss is on the buyer notwithstand- 
ing such reservation of title. This is the better rule, 
though it has not been always recognized. There are 
two classes of cases : (1) where the buyer is given pos- 
session of the goods, but it is stipulated that ownership 
is reserved until all or a part of the purchase price is 
paid ; and (2) where goods are shipped, and the shipper 
retains title in himself during shipment for purposes of 
security. 

Questions and Problems 

(183) Is change of ownership in a contract of sale necessarily 
coterminous with change of possession ? 

(184) A contracts to sell B 10 cattle of a certain description 
out of a herd of 150, to be selected by A and delivered to B. A 
refuses to perform. B claims ownership of ten cattle. Is he 
right? Why? 

L 



146 BUSINESS LAW 

(185) If the goods are ascertained at the time of the sale and 
in a deliverable state, what is the presumption? If not in a 
deliverable state, what? 

(186) A, in Chicago, orders from B, in New York, a quantity 
of wrapping paper. B ships it via M. Ry. Co. The goods are 
lost en route. Must A pay B for the goods ? 

(187) In the above case suppose goods had been shipped 
" C. O. D." Would this change your answer? 

(188) What is the meaning of letters " F. O. B.," often used 
in contracts of sale? Do they have anything to do with transfer 
of ownership ? 

(189) With whom is risk of loss as between buyer and seller? 



CHAPTER XXVI 
SALES BY TRANSFER OF DOCUMENT OF TITLE 

Purpose of documents of title. When personal 
property is shipped, a document is issued showing its 
possession by the carrier and setting forth the contract 
of shipment. This document is called a Bill of Lading. 
When goods are stored in a public warehouse a similar 
document shows the possession by and the contract 
with the Warehouse Company. This document is 
called a Warehouse Receipt. Documents of this kind 
are called Documents of Title. They represent the 
goods, and the sale or pledge of the goods can be ac- 
complished by a transfer of the document representing 
the goods. 

There are certain other documents which are also 
documents of title from another standpoint — docu- 
ments in which the transfer of title is made or evidenced. 
Such are deeds of real estate and bills of sale of personal 
property. These, however, are not documents of title 
in the sense now intended. A bill of sale from A toB 
is not transferred in a sale of the property from B to C. 
B makes out a new bill of sale, or perhaps no bill of sale 
is used at all. In the case of the shipment or ware- 
housing of goods, it is to be noticed that the owner of 
the goods has placed them with a bailee and has received 
from such bailee a document which represents the 

147 



148 BUSINESS LAW 

ownership ; and the law permits the transfer of such 
goods so bailed, by a transfer of the document so rep- 
resenting them. 

Negotiable and non-negotiable documents of title. 
Bills of lading and warehouse receipts may be issued 
in non-negotiable form and negotiable form. A non-ne- 
gotiable bill of lading is called a straight bill of lading 
and a negotiable bill is called an order bill. A negotiable 
document of title is issued to the " order" of a person, or 
to " bearer " ; a non-negotiable document is issued to a 
certain person. Both kinds of documents are transfer- 
able to effect the sale or pledge of the goods them- 
selves, but here is the difference. The railroad or bailee 
need not assume that a straight bill or receipt has been 
transferred until it has notice and may therefore deal 
with the original consignee or owner named in the bill 
without his production of the bill of lading or receipt, 
while it must be assumed that a negotiable bill or re- 
ceipt may have been transferred and therefore its 
production must be required before the goods are sur- 
rendered. And there are also other differences for the 
protection of a transferee which we have not time to 
notice. 

How transfer of document of title effected. The 
transfer of a document of title is effected by a delivery 
of the document properly indorsed where necessary. 
Negotiable documents of title are either to order of a 
certain person or to bearer. If to the order of a certain 
person he must indorse ; but if to bearer, indorsement 
is not necessary but transfer may be accomplished by 
mere delivery. A non-negotiable document can also be 
transferred by assignment. 



SALES BY TRANSFER OF DOCUMENT OF TITLE 149 

Questions and Problems 

(190) What are the two main sorts of document of title? 
Why is a bill of sale not a document of title in the same sense ? 

(191) What is a negotiable document of title? What is a 
non-negotiable document ? 

(192) Must a document of title be indorsed when it is trans- 
ferred ? 

(193) X Ry. Co. issues a non-negotiable bill of lading to A. 
A transfers it to B. B does not notify the Ry. Co. A applies 
at point of destination of goods (being consignee named in bill 
of lading). The Ry. Co. gives him the goods. B brings suit 
against the Ry. Co. alleging it should have required the pro- 
duction of the bill of lading. Can he win ? 



CHAPTER XXVII 

OWNERSHIP AND RIGHTS OF THIRD PERSONS 

IN GENERAL 

The ownership of the goods at any particular time 
has been considered from the standpoint of buyer and 
seller. The question may be important to a pur- 
chaser from buyer or seller or to a creditor of buyer or 
seller. Generally, the rights of such third persons de- 
pend upon the actual condition of the title. Thus, if 
A has made a contract of sale with B, and B's creditor 
C seeks to have an officer levy upon the goods, the right 
of C would depend upon whether, as between A and B, 
title had yet passed. So if A, contrary to his duty to 
B, should attempt to sell the goods to D, D could get no 
title unless title had not been passed. This is the 
general rule. There are some exceptions to be noticed. 

SITUATIONS IN WHICH PURCHASER OR CREDITOR FROM 
BUYER OR SELLER MAY IGNORE TRUE OWNER 

Seller allowed to retain possession. Notwithstand- 
ing the general rule that only a true owner can convey 
title, an exception exists in cases in which the seller in 
an absolute sale is allowed by the buyer to retain posses- 
sion. This situation conduces so easily to fraud no 
matter how innocent the buyer may really have been in 
allowing the retention, that in many states the situation 

150 



OWNERSHIP AND RIGHTS OF THIRD PERSONS 15 1 

constitutes legal fraud, which cannot be rebutted al- 
though in other states the presumption of fraud is a re- 
buttable one. 

Example 100. A owns sheep. His creditor 
sues him, obtains judgment and has execution 
levied on the sheep. C claims that some time 
ago he bought the sheep and that therefore 
they are not subject to B's writ; and he pro- 
duces a bill of sale of prior date, asserting that 
he allowed A to remain in possession until a more 
convenient time. In many states C would be 
irrebuttably deemed a party to a fraud and the 
good or bad intention would be immaterial, al- 
though in some states he could overcome the 
presumption of fraud by clear proof of the good 
faith of the transaction. 

Conditional sales. In most states one who gives 
possession of property to another under a contract 
that when a certain amount of money is paid the pur- 
chaser shall have title, the purchaser being in posses- 
sion may transfer a good title to a third person who 
gives value and has no notice, unless the conditional sale 
is recorded pursuant to the provisions of the law. 

Chattel mortgages. One who has a chattel mortgage 
upon goods which are in possession of the owner must 
protect himself by putting the chattel mortgage upon 
record and otherwise complying with the chattel mort- 
gage law of the particular state. 

Bulk sales. In many states a sale of all or the bulk 
of one's property (as the sale of a place of business) 
is void as to creditors unless certain formalities (as 
five days' notice to creditors) are complied with. 

Questions and Problems 

(194) May a third person ever ignore the actual condition of 
the title? What is the general rule? 



152 BUSINESS LAW 

(195) A sells an automobile to B, but as B is going to be out 
of town he requests A to keep and use it until he returns. A, 
taking advantage of his possession, sells to C, an innocent pur- 
chaser. B, coming back, finds C in possession and demands the 
car. Is B's title superior to C's? 

(196) A sells goods to B upon installments of the price, title 
not to pass until the last installment is paid although B is to have 
immediate possession. B, before the last installment is due, and 
intending not to pay it, sells to C, who thinks B is the owner. Can 
A recover the goods from C? 



CHAPTER XXVIII 
THE EFFECT OF ACCEPTANCE 

If the buyer accepts the goods it may be argued that 
he is satisfied in regard to the performance and cannot 
be heard to say that the seller has not performed his 
obligations. But it is readily seen that justice to the 
seller himself is often served by the buyer's acceptance. 
General rules may be stated. Let us first, however, 
ask what constitutes acceptance. 

WHAT CONSTITUTES ACCEPTANCE 

Acceptance consists in receiving the goods and re- 
taining them after a reasonable opportunity for in- 
spection has elapsed. There is the implied condition 
that a buyer of goods shall have a reasonable oppor- 
tunity to inspect. He cannot always open the goods 
and examine them thoroughly before allowing them to 
be left. What constitutes reasonable opportunity de- 
pends on the nature of the goods and other circumstances. 
With this in mind as the meaning of acceptance, let 
us consider its effect. 

AFTER ACCEPTANCE NO RIGHT OF REJECTION 

The acceptance by the buyer after he has had a reason- 
able opportunity for examination will take from the 

153 



154 BUSINESS LAW 

buyer his right to return the goods on account of the 
defects which such examination should have disclosed. 

Example 101. A sells goods to B which B re- 
tains, knowing that they are not in accord with 
specifications. Whatever B's rights are for 
damages, he has waived his right to reject the 
goods. 

RIGHT OF DAMAGES FOR DELAYED PERFORMANCE OR FOR 
BREACH OF WARRANTY 

Acceptance does not bar the right to have damages 
for breach of warranty or for delay where the circum- 
stances show that the buyer did not intend by his accept- 
ance to accept the goods in full satisfaction. In such 
a case a buyer should accept under protest and with 
immediate notice to the seller of his claim. In some 
cases it has been held that acceptance of goods under a 
sale containing implied warranties waives the right to 
sue on the warranty, but this does not seem a logical 
distinction between express and implied warranties. 
The Uniform Sales Act provides that such acceptance 
shall not constitute waiver and adds that the buyer 
must in such a case within a reasonable time after he 
knows or should know of the breach, give notice thereof 
to the seller. 

In the case of an express warranty there has never 
been any question but that the goods may be retained 
and suit for damages be brought on the warranty. 

Questions and Problems 

(197) A buys a set of books for B, a publisher. The books 
are delivered by messenger and A receipts for them. He looks 
through them during the next few days and finds several pages 
torn or blurred. Has he any right to return the books? 



THE EFFECT OF ACCEPTANCE 1 55 

(198) A orders boxes from a manufacturer of boxes. They 
are defective boxes and A notifies the seller of that fact, but does 
not return or offer to return them. He sues for damages and the 
attorney for the seller asks the court to rule that by retention he 
has lost his right to have damages. Shall the court so rule ? 

(199) Is the rule the same in the case of an express warranty ? 



CHAPTER XXIX 
THE REMEDIES OF THE PARTIES 

THE RIGHTS OF AN UNPAID SELLER 

Unpaid seller's lien. An unpaid seller has a lien upon 
the goods for the purchase price so long as they are in 
his possession, unless the sale was upon unexpired credit. 
He loses this lien by parting with the goods. 

Right of resale and rescission. A seller in possession 
of goods may for the default of the buyer resell them or 
rescind the bargain where the goods are of a perishable 
nature or the buyer continues in default after a rea- 
sonable length of time even though title had passed. 

Right of stoppage in transit. A seller who has lost 
his lien upon the goods by reason of their delivery to a 
carrier as an agent for the buyer may nevertheless stop 
the goods in transit and reassert his lien thereupon, 
when he learns of the insolvency of the buyer in time to 
stop them in such transit. 

Right to sue for damages. The seller may sue for 
the purchase price when title has passed to the buyer, 
or he may sue for damages where title has not passed 
and the buyer refused to carry out his contract. 

REMEDIES OF BUYER 

Goods undelivered and title not passed. Here the 
buyer's remedy is to sue for damages. Only in very 
exceptional cases could he get the goods themselves. 

156 



THE REMEDIES OF THE PARTIES 157 

Goods undelivered and title passed. In this case the 
buyer may get the goods by an action of replevin or he 
may sue for damages for wrongful detention. 

Questions and Problems 

(200) What is an unpaid seller's lien ? 

(201) What is the right of resale and rescission ? 

(202) Define right of stoppage in transit. When does it 
cease? Would it apply to the case of goods in shipment to 
which title had not been passed to buyer? 

(203) State the remedies of a buyer against a seller in default. 



PART V 
NEGOTIABLE PAPER 

CHAPTER XXX 
FORMS OF NEGOTIABLE PAPER 

MEANING OF WORD " NEGOTIABLE " 

One party to a contract cannot, under the general 
law of contracts, transfer his right thereunder as an 
independent thing. Whoever acquires it from him by 
assignment must take it in its bearing upon and rela- 
tion to the transaction in which it arose. Any other 
rule would involve any person who made a contract in 
greater obligations than he chose to assume. We have 
already noticed this principle; but an example will 
recall it to our memory. 

Example 102. B employs A at a salary of 
$100 per month. If A assigns his salary to C, 
C can get no better right than A has to the 
salary. The defenses of prior payment to A, 
non-performance by A, fraud by A, or other de- 
fense, if any, which B has, may be made as 
readily against C as against A, no matter what 
C gave to A as a consideration for the assign- 
ment. 

We see at once the justice of this rule. One contracts 
with a party without intending that any other person 
shall have the right to step in and acquire rights that 
shall disturb the transaction in its mutual obligations. 

158 



FORMS OF NEGOTIABLE PAPER 159 

There is, however, a need in the business world that 
contractual promises to pay money may be made in 
such form that they may be transferable as independ- 
ent promises, separable from the transactions out of 
which they arose, to which credit can be given accord- 
ing to their verbal tenor without the possibility of un- 
known defenses being set up against their enforcement. 
To meet this commercial need, the law has said that a 
person making a promise to pay money may, if it is 
desired by the parties, indicate to the world at large 
by the form of his promise that the promisee may trans- 
fer it for value, and that when so transferred to an in- 
nocent party, the promisor will honor it according to 
its tenor, without reference to any counter rights which 
he might have against the party with whom he originally 
contracted. In this manner an obligation to pay money 
may come to have some of the properties of money and 
to an extent make the place thereof, as the holder there- 
of is enabled by its character to change it readily into 
money by selling or discounting it to another. 

This indication of intention is accomplished by the 
form in which the obligation is expressed. The form 
which shall indicate this quality is settled by the law, 
and when one adopts that form he is conclusively pre- 
sumed to have intended to give this negotiable character 
to his act. It is for this reason that form has so much 
importance in the law of negotiable paper. We shall 
see in our further study how much depends upon form, 
and also how the subject is set about with rules. 

For this main reason in these days, whatever may have 
been its historical origin, and for other advantages 
which will appear in these chapters, we have the law of 



160 BUSINESS LAW 

negotiable paper, called also the law of commercial 
paper, the law of negotiable instruments, and the law of 
hills, notes and checks. 

The law of negotiable paper deals with three classes 
of instruments : (i) promissory notes ; (2) bills of 
exchange ; (3) checks. There are various forms of each 
of these, as we shall indicate. 

PROMISSORY NOTES 

Promissory note defined and illustrated. A promis- 
sory note is " an unconditional promise in writing, made 
by one person to another, signed by the maker, engag- 
ing to pay on demand, or at a fixed or determinable 
future time, a sum certain in money, to order or to 

bearer." 

Example 103. The following is an ordinary 
form of a negotiable promissory note. 



$100 Chicago, III. — Aug. i, 1919 

Thirty days after date I promise to pay to the order of 

James Brown, the sum of One Hundred Dollars, with 

interest from date at the rate of six per cent per annum, 

value received. 

Henry Jones. 



The holder of this note may sell it, and the purchaser 
need not concern himself with the details or nature of 
the transaction out of which it arose, as he would be 
compelled to concern himself were it non-negotiable. 
He knows that it is a promise to pay money put in this 
form in order that the holder might freely dispose of 
if to any one who, having purchased it for value and in 
good faith, could enforce it according to its tenor with- 



FORMS OF NEGOTIABLE PAPER l6l 

out regard to its original part in the bargain which gave 
it birth. 

Parties to promissory note. The party who makes a 
promissory note is called the maker. The party to 
whom it is payable is called the payee. Sometimes 
one makes a note payable to himself. In that case it 
is an incomplete instrument until it is indorsed by the 
maker-payee. Sometimes the payee is described as 
bearer (as we shall more fully note later) . The payee 
may transfer this note. If he does, unless it is payable 
to bearer, he must indorse it, and if payable to bearer he 
may indorse it. Parties writing their names upon the 
back for the purposes of transfer are called indorsers. 
One who as payee or indorsee has paper at any par- 
ticular time is called a holder. 

Special forms of promissory notes. One special form 
of promissory note is a certificate of deposit, or paper 
issued by a bank certifying that the amount stated has 
been deposited and will be paid to the holder, with in- 
terest at a stated rate, upon the return of the certificate 
properly indorsed. It is negotiable if it contains all of 
the requirements of the law governing negotiable paper. 

Another form of promissory note is a bond. When 
drawn to meet the requirements of the negotiable in- 
struments lav/ it is negotiable. This kind of bond must 
be distinguished from a penal bond given by one to 
insure his performance of an obligation under penalty 
of paying damages if he does not do so, and generally 
also joined in by a surety. Such bonds are, of course, 
not negotiable. A negotiable bond is a promise by 
the government, or municipal or private corporation or 
association to pay with interest a sum of money to the 

M 



162 BUSINESS LAW 

holder of the bond. In the case of a government or 
municipal bond the issue of bonds is authorized by some 
law passed for that purpose and in the case of a private 
bond there is usually a security in the form of a mort- 
gage or trust deed upon real estate owned by the makers 
of the bond issue. Bonds are issued in quantities con- 
stituting a bond issue. The bonds constituting the issue 
are of certain denominations, as $100, $500, $1000. The 
interest may be set forth in the form of coupons which 
can be clipped off and collected as they fall due. Such 
bonds are called coupon bonds and are made payable 
to bearer. A registered bond is a bond which provides 
for the registration of the owner or holder on the books 
of the company, and its transfer must be accomplished 
by change of registration. 

BILLS OF EXCHANGE 

Bills of exchange defined and illustrated. A bill 
of exchange may be denned as an unconditional order 
in writing, addressed by one person to another, signed 
by the person giving it, requiring the person to whom it 
is addressed to pay on demand or at a fixed or deter- 
minable future time, a sum certain in money, to order 
or to bearer. 

Example 104. The following is an example 
of a bill of exchange. 



Chicago, Illinois — July 6, 1918 

Pay to the order of William Jones One Thousand 

Dollars thirty days after date, and charge to my account. 

John Smith. 
To Henry Hawley & Co. 



FORMS OF NEGOTIABLE PAPER 163 

Bills of exchange in sets. A bill of exchange is some- 
times drawn in parts, usually three, similarly drawn, 
numbered consecutively and referring to each other, 
constituting what is called a set, the entire set consti- 
tuting one bill. The parts may then be sent separately 
to insure arrival. Any part may be accepted by the 
drawee and that will constitute an acceptance of the 
bill. Inasmuch as any accepted part may be transferred 
with the legal effect of transferring the entire bill, a 
drawee ought not to accept more than one part, for if 
he accepts more than one he may be made to pay the 
bill more than once to innocent purchasers of differ- 
ent parts. Any one who takes an unaccepted part 
should be sure to get with it the other parts so that 
he may know that there is not an accepted part out- 
standing. 

Parties to bills of exchange. The person who makes 
a bill of exchange is called a drawer. The person upon 
whom he draws his order is called a drawee. The 
person in whose favor he draws a bill is called a payee. 
If the drawee accepts the bill of exchange, that is to 
say, writes upon the face of it that he accepts it, he is 
called an acceptor. A bill of exchange may be indorsed 
either before or after acceptance, and the parties in- 
dorsing it are called indorsers. 

Special form of bills of exchange. A special form of 
bill of exchange is called a bank draft, which is merely 
a bill of exchange drawn by a bank upon another bank 
in favor of some person who purchases the draft from the 
drawer bank. Thus if a person in Chicago desires to 
pay money to a person in New York he may buy a 
draft drawn by a Chicago bank upon a New York bank 



164 BUSINESS LAW 

with which the Chicago bank has made arrangements 
for such purpose. 

Another form of bill of exchange or draft is called a 
trade acceptance. This is a draft or bill of exchange 
drawn by a seller of goods upon a buyer, in favor of a 
bank chosen by the drawer, for acceptances by the 
buyer before his bill is due. Its advantage is that the 
seller by discount at his bank may obtain payment of 
his bill at once, less the discount, and thus be in funds 
when he needs them. He may not use the paper. 

CHECKS 

Definition of check. A check is defined in the law as 
a bill of exchange drawn on a bank, payable on demand. 
The following is an example of a check. 

Example 105. 



Chicago, m.,.J u kl 5 J....19 / l *°- 

FIRST NATIONAL BANK OF CHICAGO 

Pay to the order of../^ nu f.t n ^ f/J?M.... 



Parties to checks. The maker of the check is called 
a maker or drawer. The bank upon which it is drawn 
is called the drawee hank. The party in whose favor 
it is drawn is called the payee. Those who write their 
names upon the check for purposes of transfer are called 
indorsers. 



FORMS OF NEGOTIABLE PAPER 165 

An accepted or certified check is a check which has 
been presented to the bank either by the drawer or by 
the holder for acceptance instead of for payment, and 
which has been accepted by the bank by an indorsement 
across the face of the check to the effect that it is ac- 
cepted. This makes the bank primarily liable on the 
check and thus gives the check a currency it might not 
have before. 

NEGOTIABLE DOCUMENTS OF TITLE NOT GOVERNED BY 
LAW OF NEGOTIABLE PAPER 

Certain documents are described in the law as having 
negotiable qualities and are sometimes confused with 
and called negotiable instruments, but they are 
thoroughly distinguishable from the negotiable in- 
struments described in this part of the book which are 
governed by the negotiable instruments law. We are now 
studying negotiable paper which is payable in money. 
Warehouse receipts and bills of lading may have nego- 
tiability, but they are instruments that are not payable 
in money and they are governed by an entirely separate 
body of law. Such instruments are more correctly 
described as negotiable documents of title. Being the 
evidences of the right to personal property other than 
money, they are necessarily to be governed by entirely 
different principles, notwithstanding the fact that they 
do possess some attributes of transferability which are 
similar to those possessed by negotiable paper. 

Questions and Problems 

(204) Explain Example 102. 

(205) Why does the law establish forms of promises and 
orders to pay money which indicate negotiability? 



1 66 BUSINESS LAW 

(206) Why is form so important in negotiable paper ? 

(207) What are the three general kinds of negotiable paper ? 

(208) Define a promissory note. 

(209) Draw up a promissory note. 

(210) \Vhat do we call the party who makes a promissory 
note ? To whom is it payable ? Who indorses it ? 

(211) What is a certificate of deposit ? 

(212) Define a bond ; a coupon bond ; a registered bond. 

(213) Define a bill of exchange ; draft one. 

(214) Name the different parties to a bill of exchange. 

(215) What is a bank draft ? 

(216) What is a trade acceptance ? 

(217) Describe a check. Draw one. 

(218) Who are parties to checks? 

(219) What are negotiable documents of title? Are they 
covered by the law of negotiable paper ? Why ? 



CHAPTER XXXI 
REQUISITES OF NEGOTIABLE PAPER 

Purpose of formal requisite. We have seen that the 
intention of the parties to make a promise negotiable 
in character is evidenced by the form in which they put 
it. The law furnishes that form and declares that when 
the form is used it is conclusive evidence of the inten- 
tion of the parties to make the obligation therein ex- 
pressed negotiable. Form, therefore, is very important 
in commercial paper. 

The formal requisites stated. A bill, note or check, 
to be negotiable within the meaning of the negotiable 
instruments law, must comply with the following re- 
quirements : (i) it must be in writing ; (2) must contain 
an unconditional promise or order to pay a sum certain 
in money; (3) must be payable on demand or at a 
fixed or determinable future time ; (4) must be payable 
to order or to bearer ; (5) where the instrument is 
addressed to a drawee he must be named or otherwise 
indicated therein with reasonable certainty. We will 
notice these requisites separately. 

THE WRITING AND SIGNATURE 

Writing necessary. We cannot have a negotiable 
obligation unless it is set forth and expressed in writing. 
The very idea of bill, note or check involves the thought 

167 



1 68 BUSINESS LAW 

of a writing. Writing, however, includes typewriting 
and print. 

The writing may be in ink or pencil. Prudence would 
dictate the use of ink, but a note, bill or check in pencil 
would not for that reason be non-negotiable. 

Signature. The maker of a note or the drawer of 
a bill or check must sign it. By custom the signature 
is written below the instrument. Anything intended 
as a signature is sufficient, as a mark by one who cannot 
write, or an assumed name, as, for instance, a partner- 
ship name. In that case the persons meant to be des- 
ignated by the assumed name and who authorized the 
issuance of the paper would be liable thereupon. 

Example 106. A, B and C form a partner- 
ship under the name " The Central Business 
House." C, acting for the firm, gives a note 
signed by the firm name. A, B and C are all 
liable on this note, for the name used is their 
assumed or trade name. 

If there is an incorporated company, it has a distinct 
legal existence apart from that of its members. One 
purpose of creating corporations is to evade personal 
responsibility for debts. Hence in the above example 
if The Central Business House were a corporation and 
A, B and C its stockholders they would not personally 
be liable upon its contracts. 

ABSOLUTE PROMISE OR ORDER 

Unconditional promise or order requisite. Paper is 
not negotiable unless there is (in the case of a promissory 
note) an unconditional promise, or (in the case of a bill 
or check) an unconditional order. If the promise or 
order to pay is contingent upon some event or condi- 



REQUISITES OF NEGOTIABLE PAPER 1 69 

tion, it may show a good contract, enforceable upon the 
happening of the event or condition, but it is not nego- 
tiable. Thus I may promise to pay a sum of money to 
a person when he completes a building which he has 
promised to build for me. We have a good contract 
here, but the form of it does not comply with the law of 
negotiable paper (which may indeed have been my in- 
tention), and therefore is not negotiable. In form, 
therefore, the promise or order to pay must be uncondi- 
tional or else it is not negotiable. This does not mean, 
of course, that one who has given a negotiable instru- 
ment cannot make his defenses to it when sued by the 
party to whom he has given it. Thus if I give a prom- 
issory note for five hundred dollars to John Smith, 
as advance payment of his salary, I can, if he does not 
earn the salary, defend upon that ground in the event 
I am sued by him, although my note was in the usual 
unconditional form. In other words, as between the 
parties, the absolute unconditional form of the promise 
or order does not prevent the opening up of all questions 
involved in the contract. The unconditional form is re- 
quired as a criterion to indicate intention that the promise 
or order is negotiable and may be acquired as such by 
third persons. But if in form it is conditional or con- 
tingent, third persons thereby have notice that there is 
no intention that it can be severed from the rest of the 
contract and sold as independent paper. 

Reference to transaction or consideration. The un- 
conditional and negotiable character of a promise or 
order in a note, bill or check is not affected by the fact 
that a reference to, or statement of, the consideration or 
transaction, is made in the instrument, provided the 



170 BUSINESS LAW 

reference or statement is merely such and not a quali- 
fication. 

Example 107. A sells B a horse and takes B's 
note, payable in three months, for the purchase 
price. Upon the note the following words are 
written, " This note given for purchase price of 
horse this day bought by maker of note." A 
sells this note to C who acquires it in good faith, 
for value, and before it is overdue. C presents 
the note at maturity to B, who states that he 
will not pay it because A refused to deliver the 
horse. B can be compelled to pay the note to 
C. The statement of the consideration does 
not destroy negotiability and C is not subject 
to the defense stated. 

If the statement qualifies the promise or order, or 
renders it in any way conditional, the instrument lacks 
negotiability. 

Example 108. A gives a note to B and therein 
puts the notation " subject to a contract be- 
tween the parties." The note is not negotiable, 
and any person acquiring it would take it sub- 
ject to the same defenses to which it would be 
subject had there been no transfer. (Klots 
Throwing Co. v. Mfrs. Com'l Co., 179 Fed. 813.) 

Reference to fund or account. A mere reference to a 
fund or account to which the payer may look for reim- 
bursement will not destroy negotiability, as the amount 
is still payable notwithstanding the insufficiency of 
such fund. But a direction to pay out of a fund destroys 
negotiability as the fund may not exist or be adequate. 

Example 109. A directs B to pay C or order 

$500 and adds, " charge to the Jenkinson ac- 
count." If the bill is otherwise correctly drawn, 
this notation does not destroy negotiability. 

Example 110. If A had added, " pay out 
of the proceeds of our partnership venture," 
the bill would thereby have been deprived of 



REQUISITES OF NEGOTIABLE PAPER 171 

negotiability, as there is a reference to a fund 
which may or may not have existence or suffi- 
ciency. It is to be noted that paper must be 
negotiable from its form, without a necessity of 
inquiry about extrinsic conditions. (Meany v. 
Pool, 136 N. Y. 610.) 

CERTAINTY OF SUM 

Certainty of sum requisite. It is essential to nego- 
tiability of a bill, note or check that the amount of the 
sum payable should be certain. 

Example 111. A makes a note to B, or 
order, for payment of $500, adding " and also 
all other sums which may be due." This may 
be a good contract, but even if otherwise correct 
in form it lacks negotiability on account of the 
uncertainty of the sum. (Smith v. Nightin- 
gale, 2 Starkie (Eng.) 375.) 

What will not make sum uncertain within the rule. 

The negotiable instruments act provides that a sum may 
still be regarded as certain within the rule, although it 
is payable " with interest," or by stated installments, 
or with exchange, whether at a fixed rate or at the current 
rate, or with costs of collection or an attorney's fee in 
case payment shall not be made at maturity. 

PAYMENT IN MONEY 

Payment in money requisite. An instrument to be 
negotiable must be payable in money. Thus it has been 
held that a promise to pay bearer " one ounce of gold " 
is not negotiable (Roberts v. Smith, 58 Vt. 192) and 
that a promise to pay a certain amount of money and 
do another act (Martin v. Chauntry, 2 Str. (Eng.) 
1 271), or to pay money or do another act (Matthews v. 
Houghton, n Me. 377) is not negotiable ; but a promise 



172 BUSINESS LAW 

to pay a certain amount of money or do something else 
at the holder's option is negotiable (Hodges v. Schiller, 
32 N. Y. 114). 

Specification of kind of money. The specification 
that payment must be in a particular kind of money 
does not destroy negotiability. 

PAYMENT ON DEMAND OR DETERMINABLE FUTURE TIME 

This requisite stated. In order to be negotiable a 
bill, note or check must be either payable on demand 
or payable at a fixed or determinable time. 

Demand paper. Negotiable paper may be payable 
upon demand. Paper is payable on demand when it 
is stated to be so payable, or payable at sight or on 
presentation. It is payable on demand where no time 
for payment is expressed. An instrument payable on 
demand usually reads somewhat as follows : " On 
demand I promise to pay," or "Pay to James Smith or 
order on demand." A check is always payable on 
demand, and as the reader will note from Example 105 
no time for payment is expressed in the check. If 
paper is payable on demand it must nevertheless be 
presented within a reasonable time for certain pur- 
poses as we shall note hereinafter when considering the 
rights of holders against indorsers and makers. 

Paper payable at a fixed or determinable future time. 
If paper is not payable on demand it must, in order to 
be negotiable, be payable at a fixed or determinable 
future time. It is payable at a fixed or determinable 
future time when it is expressed to be payable at a 
certain date, or at a fixed period after date or sight, or 
on or before a fixed or determinable time specified 



REQUISITES OF NEGOTIABLE PAPER 173 

therein, or at a fixed period after the occurrence of the 
specified event which is certain to happen though the 
time of happening be uncertain. 

Example 112. A note reading, " One year 
after date I promise to pay," etc. or " January 
1, 1918 after date I promise to pay," etc. is 
negotiable if otherwise correctly drawn as it is 
payable at a fixed time certain to arrive. 

Example 113. A note reading, " I promise to 
pay to the order of John Smith the sum of $1000 
when he arrives at the age of twenty-one years " 
is not negotiable, as the payee therein named 
may never arrive at that age (although if based 
on a good consideration, it may be a good non- 
negotiable contract). 

Example 114. A note reading, " I promise 
to pay to the estate of John Smith or order one 
year after the death of John Smith " is nego- 
tiable if otherwise correctly drawn, as the time 
of payment is certain to arrive. 

Of course the usual manner of indicating the maturity 
of negotiable paper is to state that it is payable either 
on demand or upon a certain date. 

PAYMENT TO ORDER OR BEARER 

Words of negotiability necessary. In order to be 
negotiable a bill, note or check must contain words of 
negotiability. The instrument contains words of nego- 
tiability when it is payable to order or to bearer. Where 
an instrument is not payable to bearer it is usually 
made payable either " to the order of John Smith," 
or "to John Smith or order." 

When payable to bearer. A bill, note or check may 
be payable to bearer and is regarded as so payable when 
it is stated therein to be payable to bearer, or when it 
is stated therein to be payable to a certain person or to 



174 BUSINESS LAW 

bearer, or when it is payable to a fictitious or non- 
existing person and such fact was known to the person 
making it so payable, or when the name of the payee does 
not purport to be the name of any person or when the 
only and last indorsement is a blank indorsement. 

Example 115. A note payable merely " to 
bearer " is, if otherwise correctly drawn, nego- 
tiable. 

Example 116. A note reading, " I promise 
to pay to cash " is payable to bearer and is nego- 
tiable if otherwise correctly drawn. 

Example 117. A note reading that it is pay- 
able to John Smith or order and then indorsed 
by John Smith in blank, that is, merely by writ- 
ing his name upon the back of the paper without 
other words, is payable to bearer. 

When paper is payable to bearer it is negotiable by 
mere delivery, that is to say, without indorsement; 
any taker of it may require the indorsement of the trans- 
feror, and if the transferor indorses it he then becomes 
liable on it as indorser, but if he passes it by mere de- 
livery he merely transfers the title to it and is not 
responsible as indorser, as we shall see. 

PROVISIONS WHICH INSTRUMENT MAY CONTAIN NOT DE- 
STRUCTIVE OF NEGOTIABILITY 

An instrument may authorize the sale of collateral 
securities and this will not destroy negotiability if it 
is otherwise correctly drawn. It may authorize a con- 
fession of judgment against the maker in favor of the 
holder for the amount due and this will not destroy ne- 
gotiability if the instrument is otherwise correctly drawn. 
It is in that case called a judgment note. Judgment 
clauses are not used in all states. A judgment clause 
reads usually somewhat as follows : 



REQUISITES OF NEGOTIABLE PAPER 1 75 

And to secure the payment of said amount I hereby au- 
thorize, irrevocably, any attorney of any Court of Record to 
appear for me in such Court, in term time or vacation, at 
any time hereafter, and confess a judgment, without process, in 
favor of the holder of this Note, for such amount as may appear 
to be unpaid thereon, together with costs and twenty dollars 
attorney's fees, and to waive and release all errors which may 
intervene in any such proceedings, and consent to immediate 
execution upon such judgment, hereby ratifying and confirming 
all that my said attorney may do by virtue hereof. 

Questions and Problems 

(220) Why does the law prescribe certain requisites for nego- 
tiable paper ? 

(221) State the formal requisites. 

(222) A makes a note in lead pencil and signs it with a rubber 
stamp impression of his name. The payee sues upon it. Can 
A defend on the ground of form ? 

(223) A sets up a tailoring business which he calls " The 
Grove Street Tailoring Co." He gives a note to the order of B, 
which he signs by this fictitious name. Is he liable on this note? 
Would he be liable if the concern were incorporated and he signed 
the note with the corporation's name by himself as its president ? 
Why? 

(224) A makes a note to B's order in terms payable when 
B delivers coal to A's place of business. Is it negotiable? 
Why? 

(225) A makes out what he terms a bill of exchange which 
he addresses to B, stating : "If you will be so kind as pay C 
or order $100, you may charge to my account," and signs it. 
C sells this to D, who presents it to B for payment. B refuses. 
D thereupon presents it to A for payment, who refuses. D sues 
A. If this is a negotiable bill of exchange A is liable. Is he 
liable? Why? ■ 

(226) A makes a note to the order of B, noting upon it that 
it is given for a horse which A has purchased from B. B before 
maturity sells the note to C. C at maturity presents the note to 



176 BUSINESS LAW 

A for payment and it is refused upon the ground that the horse 
was diseased and B knew it and practiced a fraud upon A. If 
this note is not negotiable, C is subject to this defense. Is the 
note negotiable? 

(227) Suppose in the last case the instrument had said " sub- 
ject to a contract for a horse this day sold to the maker of this 
note." Would your answer be the same? 

(228) A makes a note payable to B's order, who' indorses 
and sells it before maturity to C. The note reads : " This amount 
payable out of my profits in the A. B. land venture." Is this 
note negotiable ? 

(229) " Chicago, Illinois, January 9, 1919. To James Smith, 
Please pay to this order of John Adams the sum of $500, less what 
is due you for burlapping. (Signed) Charles Brown." Discuss 
negotiability. 

(230) " Chicago, Illinois, January 9, 1919. One year after 
date I promise to pay to the order of John Adams, $1000, and I 
agree in addition to paint his barn for him within three months 
from date. (Signed) Charles Brown." Discuss negotiability. 

(231) A made an instrument in the form of a promissory 
note, promising to pay to the order of B $300 " and all other sums 
that may be due B." B sold and indorsed this instrument to C, 
who gave value and bought before maturity. It turned out that 
the note was entirely without consideration between A and B. 
Can A plead this defense against C ? 

(232) Is a note that provides for the payment of a" reason- 
able " attorney's fee for collection in case it is not paid at maturity, 
negotiable ? 

(233) A makes a note reading, " on or before July 1, 1916, 
I promise to pay," etc. Does this note comply with the nego- 
tiable instruments law as to time of payment ? 

(234) State all the cases in which negotiable paper is payable 
on demand. 

(235) If negotiable paper is not payable on demand, when 
must it be payable ? 

(236) " Chicago, January 9, 1913. One year after A's mar- 
riage with B, I promise to pay to him or his order the sum of 
$1000. (Signed) Henry Smith." Discuss negotiability. 



REQUISITES OF NEGOTIABLE PAPER 177 

(237) "Chicago, Illinois, January 9, 1913. One year from 
date I promise to pay John Adams, $1000, value received. 
(Signed) John Brown." Discuss negotiability. 

(238) What are words of negotiability? 

(239) What is a judgment note ? 



CHAPTER XXXII 
NEGOTIATION OF NEGOTIABLE PAPER 

MEANING OF NEGOTIATION 

Negotiation defined. Negotiation is the act of trans- 
ferring negotiable paper for the purpose of investing the 
transferee thereof with the legal title. In other words, 
it is an assignment of the paper with the peculiar prop- 
erties which attach to such an assignment under the 
law of negotiable paper. 

Negotiation accomplished by delivery. Negotiation 
may be accomplished by mere delivery, that is to say, 
without any indorsement, in all cases in which the paper 
is payable to bearer. It will be remembered that 
paper is payable to bearer (i) when it is so stated to be 
payable, (2) when it is payable to a certain person or 
bearer, (3) when it is payable to a fictitious payee, or 
(4) to a payee not intended by the maker to have any 
interest in the paper, and (5) when it is indorsed in 
blank. Paper which is payable to bearer under any of 
these headings may nevertheless be indorsed, as the 
taker of such paper might not be content to receive it 
by mere delivery, and in case such paper is indorsed 
the transferor assumes a heavier liability than in case 
he transfers by mere delivery as we shall notice later. 

Example 118. A draws a check payable to 
" cash." This check may pass from hand to 
hand by mere delivery, or it may be indorsed 
if the parties so desire. 

178 



NEGOTIATION OF NEGOTIABLE PAPER 179 

Negotiation accomplished by indorsement. In any 
case where paper is not payable to bearer it must be 
indorsed in order to accomplish the transfer of the legal 
title. Thus, A makes a note payable to the order of 
B. B must indorse this paper in order to transfer it 
to C. 

MANNER OF INDORSEMENT 

Indorsement must be in writing. An indorsement of 
negotiable paper must be in writing. It might be with 
lead pencil, but this from a business standpoint would 
be inadvisable. 

Indorsement must be on the instrument itself. The 
indorsement of negotiable paper is accomplished by 
writing the indorsement upon the back of the paper. 
The indorsement cannot be by a separate instrument 
in writing. If, however, the back of the paper has been 
filled up with indorsements, it is proper to attach another 
paper to the instrument as an elongation thereof to 
receive the further indorsements. This addition is 
called an allonge. 

KINDS OF INDORSEMENTS 

Indorsement in blank. An indorsement in blank is 
an indorsement accomplished by merely writing the 
name of the transferor upon the back of the paper. 

Example 119. John Smith makes a promis- 
sory note to the order of Harry Jones. If Harry 
Jones indorses this in blank he merely writes 
upon the back of the paper his name, Harry 
Jones. 

Special indorsement. A special indorsement is an 
indorsement to some particular person. For example, 



180 BUSINESS LAW 

in the last illustration Harry Jones might have written 
upon the back of the paper, " pay to the order of Thomas 
Young," signed " Harry Jones." In this case the further 
negotiation of the paper would have to be accomplished 
by the signature of Thomas Young. In the case of a 
blank indorsement, the further transfer may be by mere 
delivery. A special indorsement is therefore a safer 
method, as in the case of a blank indorsement if the 
paper is lost or stolen and then sold to an innocent 
purchaser, the innocent purchaser would get a good 
title to the paper, while in the case of a special indorse- 
ment no such good title could be obtained on account of 
the lack of further indorsement of the special indorsee, 
and if any one forged such signature, no title could be 
taken through that forgery. In the case of a blank 
indorsement, the holder may transfer it into a special 
indorsement by merely writing above it, " pay to the 
order of " the person named. 

Qualified indorsement. A qualified indorsement is 
an indorsement in which the indorser qualifies his con- 
tract by the addition of words to that effect. Such 
qualification is usually in the word " without recourse." 

Example 119 a. A makes a note payable to 
the order of B. B indorses without recourse 
to C. C applies to A for payment and finds A 
insolvent. He cannot compel B to pay the 
paper, as B by contract has qualified the indorse- 
ment and made himself merely a transferor and 
not a general indorser of the paper. 

Conditional indorsement. A conditional indorsement 
is an indorsement by one to another to take effect upon 
certain conditions. The law provides that any one 
compelled to pay such paper may disregard the condi- 



NEGOTIATION OF NEGOTIABLE PAPER 181 

tion, that being a matter between the indorser and 
indorsee. 

Restrictive indorsement. A restrictive indorsement 
is one which restricts a further transfer of the paper. 

An example of a restrictive indorsement is an in- 
dorsement for collection only. Here further transfer 
is prevented except for the purposes of the restrictive 
indorsement. The other indorsements we have been 
considering do not restrict the further transfer of the 
paper. For instance, a qualified indorsement may be 
the first in a long line of indorsements. 

Questions and Problems 

(240) State meanings of " negotiation." 

(241) A check is payable to " cash." State whether it must 
be indorsed to transfer it. Why? 

(242) A note is payable to order of B. B writes his name in 
blank on back and transfers it to C. Can C transfer it without 
indorsing it ? 

(243) When must paper be indorsed in order to transfer it? 
If it need not be indorsed, might the transferor indorse it any- 
way? Why? 

(244) Can an indorsement be on a separate paper? What is 
an allonge ? 

(245) What is an indorsement in blank? A special indorse- 
ment? A qualified indorsement? A conditional indorsement? 
A restrictive indorsement ? 



CHAPTER XXXIII 

RIGHTS OF TRANSFEREE 

We have seen that a primary purpose of making paper 
negotiable is to enable the taker thereof to take it as an 
independent obligation with no concern for the trans- 
action out of which it arose. For instance, if a note is 
brought to him which he is requested to purchase, or 
upon which he is requested to loan money, he has 
nothing to do with the origin of that note or with the 
defenses that may be made against it in case suit is 
brought upon it against the original payee. He takes 
it for its face value as a promise or obligation to pay 
money. But some other important qualifications are 
necessary to be made. If there are defenses against 
the enforcement of the paper the party to whom it is 
negotiated must show in order to recover against the 
maker or acceptor, that he received it under certain 
conditions. He must show that he received it before 
it was overdue; that he gave value for it; and that 
he took it in good faith ; and further if indorsement is 
necessary to its title he must show that it was properly 
indorsed to him before he received notice of the de- 
fense. A party who takes paper, having complied with 
all these requirements, is called technically a " holder 
in due course. " The phrase, holder in due course, 
therefore describes one who has received negotiable 

182 



^RIGHTS OF TRANSFEREE 183 

paper: (1) for value; (2) in good faith; (3) before 
it was overdue; (4) by proper indorsement where 
necessary. Such a party is sometimes described as 
innocent purchaser for value, but the best description 
is that of holder in due course and this technically con- 
tains all the elements that are necessary to give him as 
perfect a title as he can obtain under the law of negotiable 
paper. If there are no defenses that can be made to 
the enforcement of the paper, then it is not necessary 
that a taker show that he is a holder in due course. In 
other words, a note may be transferred after it is mature 
and may be the subject of a gift, and the maker thereof 
must pay it to the person to whom it is so transferred 
if he has no defenses that he could have used against 
the party who transferred it. 

Example 120. A makes a note payable to 
the order of B. B transfers it to C. If A has 
any defense to the enforcement of this paper, 
C must show that he acquired it as a holder in 
due course. But if A has no defense and must 
pay it to B, in case B does not transfer it, then 
he must pay it to C in case B does transfer it, 
even if B transfers it after maturity and with- 
out value, for it is no concern of his when the 
transfer took place or what B got for it. He 
owes the money and must either pay it to B or 
to any one to whom B has transferred the evi- 
dence of the indebtedness. 

We will now consider briefly the different items which 
enter into the definition of holder in due course. 

WHAT IS HOLDER IN DUE COURSE? 

Holder in due course must take paper by necessary 
indorsement. If paper is not payable to bearer, either 
by its tenor or by the manner of its indorsement, a 



1 84 BUSINESS LAW 

party who desires to enforce it against the maker in 
spite of the defenses that such maker may have against 
it, must show that the requisite indorsement to him was 
made before he received notice of a defense. 

Example 121. A has a check drawn by B, 
payable to A or order. A secured this check 
in a fraudulent transaction. He transfers the 
check to C, who gives value for it and has no 
notice of the fraud. The indorsement, how- 
ever, was overlooked at the time of the trans- 
fer and C receives notice of the fraud before he 
procures the indorsement. His right to enforce 
the check against A is subject to the same de- 
fense which A could have made against B. 

Holder in due course must give value. One who 

seeks to qualify as a holder in due course must give 
value for the paper which he acquired. It is not neces- 
sary that he give full face value, and he may even pur- 
chase at a heavy discount, although the amount which 
he gives might be an element in determining whether 
he purchased in good faith. 

Example 122. A makes a note payable to 
order of B for the sum of $ioo. B sells it to C 
for $90 before it is overdue ; C purchases in good 
faith. C can compel A to pay $100 on this note 
notwithstanding A might have had a defense 
against B had B brought the suit. If, however, 
C had purchased this note for $10, that with 
other evidence might go to show that he bought 
it in bad faith. But except for this purpose 
the amount which C pays is immaterial, and if 
A has no defense, B may, as we have seen be- 
fore, give it to C for nothing or sell it for what 
he pleases, and it will be none of A's concern, 
for if he must pay it to B he loses nothing in a 
transfer of B's right to C, whether that transfer 
is by way of gift or sale. In other words, the 
holder of a note may give it away, as is fre- 
quently done, and the donee may enforce it 



RIGHTS OF TRANSFEREE 1 85 

for its face value unless there are defenses against 
it, and he is subject to these defenses unless he 
has given value. 

Holder in due course must acquire paper in good 
faith. To be a holder in due course the taker of nego- 
tiable paper must purchase it in good faith. It is not 
necessary that he be diligent in discovering possible 
reasons for not purchasing it, but it is enough if when 
he buys it he had no notice of any defense against its 
enforcement and buys it under such circumstances as 
to show good faith on his part. If he has notice of any 
defense against its enforcement, he is subject to that 
defense, as of course he is not then purchasing in good 
faith, or if the circumstances are so suspicious as to 
indicate that he must have been a party to a fraud 
against the maker or must have known that there was 
something wrong, whether he knew exactly what that 
was or not, he will not be a holder in good faith. 

Holder in due course must acquire paper before it is 
overdue. Overdue paper may be transferred in the 
same manner as paper not yet due ; but if the person 
who is liable on it as maker or acceptor has defenses 
against the person to whom he gave it, he can make 
these defenses against one who buys it after it is over- 
due, although such transferee gave value and had no 
notice of the defense. In other words a holder in due 
course must acquire the paper before it is overdue. In 
this connection paper which is due on demand is con- 
sidered overdue when it has been outstanding more than 
a reasonable length of time since its issue or last transfer. 

Taker from holder in due course is holder in due 
course. If one takes paper from a holder in due course 
he is a holder in due course for that reason. 



1 86 BUSINESS LAW 

Example 123. A makes and delivers a note 
to B or order. The note is procured by fraud 
which A could set up against B if sued by B. 
B transfers to C, who takes in good faith before 
maturity and for value. After maturity C 
transfers to D, who gives no value. C is a 
holder in due course and D is therefore a holder 
in due course for he succeeds to C's title. 



RIGHT OF A HOLDER IN DUE COURSE AGAINST PARTY 
PRIMARILY LIABLE 

General statement. We have frequently said hereto- 
fore that negotiable paper is paper which can be trans- 
ferred with the effect of giving the taker a better right 
than the transferor himself had, and that a person 
buying negotiable paper may disregard the circum- 
stances of the transaction out of which it arose and 
consider it as an independent obligation so long as he 
actually has no notice of anything wrong and bought 
for value and before overdue. We must qualify that 
statement at this point to some extent. The law of 
negotiable paper requires that paper be transferred with- 
out taking with it the defenses between the original 
parties, but there are some unusual defenses in which 
this demand of the law of negotiable paper runs counter 
to stronger reasons of public policy, and must therefore 
give way to the reasons existing in those exceptional 
cases. All the defenses that merely arise out of contract 
between the parties are subject to the law of negotiable 
paper, and cannot be used as defenses against the 
holder in due course. But where this requirement of 
the business world runs against a stronger demand of 
some other branch of the law a qualification must be 
made in favor of that other branch of the Jaw. For 



RIGHTS OF TRANSFEREE 187 

instance, the general policy of the law of negotiable 
paper would require that the defense of infancy could 
not be set up against a holder in due course, but the law 
protecting minors also requires that a minor be enabled 
to assert his minority against all the world, and this re- 
quirement is stronger than the requirement of the general 
law of negotiable paper and therefore the law of commer- 
cial paper makes a qualification that a holder in due 
course, while generally not subject to defenses, is subject 
to this defense. It is for reasons of this sort that we 
now see that notwithstanding the general rule that a 
holder in due course does not take subject to defenses, 
there are some defenses to which he is subject. 

DEFENSES WHICH ARE NOT GOOD AGAINST THE HOLDER 
IN DUE COURSE 

General statement. The following defenses which 
could have been made against the party from whom the 
paper was acquired had he brought suit thereon cannot 
be made against one who acquires the paper under such 
circumstances that he is constituted a holder in due 
course. These defenses are called personal defenses, 
as in the law of negotiable paper they can be made only 
against certain persons, namely the original party to 
the contract, and not against one who has taken the 
paper as a holder in due course. They are the usual de- 
fenses which would be raised. They consist in matters 
which arise out of the merits of the transaction itself. 

Fraud in the inducement. This is a defense which 
cannot be made against a holder in due course. 

Example 124. A sells mining stock to B, 
fraudulently representing the value of the stock, 



188 BUSINESS LAW 

and B gives A his negotiable promissory note 
in payment for the stock. Before his paper is 
overdue A sells it to C for value, C taking it 
in good faith. C sues B. B will not be allowed 
to make the defense against C of fraud which 
he could have made against A had A brought 
suit on the paper. If C has not bought under all 
the conditions which make him a holder indue 
course, he is subject to the same defense to 
which A would be subject had suit been brought 
by him. 

Lack of consideration. If a negotiable instrument is 
not supported by consideration, it is, under the general 
rule of contracts, not enforceable. But if it is sold to 
a holder in due course, this defense cannot be made 
against him. 

Example 125. A as a present to B gives B 
his promissory note for $500. B sells to C, the 
holder in due course. C sues A. Defense of no 
consideration, which could have been made 
against B had he brought suit, is not good 
against C. 

Failure of consideration and breach of contract are de- 
fenses which are not good against a holder in due course. 

Example 126. A contracts to sell B a horse 
thirty days thereafter, and B gives his promis- 
sory note for the purchase price. Before the 
time of the performance of the contract the 
horse dies. Before the note is due A sells the 
note to C, for value, who has no knowledge 
of the defense. The defense which could have 
been made against A could not have been 
made against C, a holder in due course. 

Payment before maturity is a defense which cannot be 
made against a holder in due course. If a person pays 
negotiable paper before it is overdue, he should be 
sure to take up the paper. 



RIGHTS OF TRANSFEREE 1 89 

Example 127. A borrows $100 from B and 
gives his note for sixty days. In thirty days' 
time, having the money, he goes to B and states 
that he desires to pay the note. B states that 
the note is in a vault to which he does not have 
immediate access, but he will take the money 
and give A a receipt and send him the note in a 
day or two. As a matter of fact B has borrowed 
money from C and given A's note as collateral. 
B fails to take care of the paper and becomes 
financially insolvent. C sues A. The defense of 
payment which A could have made against B 
cannot be made against C, the holder in due 
course. A was unwise to make payment of this 
paper unless B produced it for him to take up 
upon payment. 

Set-off is a defense which cannot be made against a 
holder in due course. In other words, if the maker of 
a note has a counter-claim against the original payee, 
which he could have set off against the payee's claim 
in reduction or discharge thereof, he cannot avail him- 
self of this defense if the payee transfers the instrument 
to a holder in due course. 

Theft or lack of delivery of paper payable to bearer is 

a defense that cannot be set up against a holder in due 

course. 

Example 128. A makes a note payable to 
the order of B, and B indorses it in blank. 
This makes the paper payable to bearer. B 
then loses the paper and it is found by C, who 
transfers it to D. D, who is innocent, pays 
value and takes the paper before it is overdue. 
A is liable on this paper as maker and B as in- 
dorsee Had this paper not been payable to 
bearer by the fact that the last negotiation was 
a blank indorsement, or, in other words, had 
indorsement been necessary to transfer and had 
C forged that indorsement, then D would have 
gotten no title as it would have been neces- 
sary for him to trace title through a forgery, 
which cannot be done. 



190 BUSINESS LAW 

DEFENSES WHICH ARE GOOD AGAINST A HOLDER IN DUE 

COURSE 

General statement. The above defenses, known as 
personal defenses, are the usual defenses which would 
be sought to be raised against the enforcement of nego- 
tiable paper, and, generally speaking, arise out of the 
merits of the transaction and are cut off by a transfer 
on account of the demand of the business world to have 
paper which will in the law accomplish this object. We 
now take up a few defenses which can be made even 
against a holder in due course for the reason that the 
need of allowing these defenses on account of other 
principles of law is greater than the need arising out of 
the law of commercial paper, and this law therefore 
makes an exception of these cases and a holder in due 
course is not protected. 

Forgery is a defense that can be made against any one. 
The reason is clear. If one's name is forged to a note, 
bill or check, then the paper is simply not his paper. 
That is all there is to it. If by forgery one could make 
another person liable even to a holder in due course, 
then any man's fortune could be taken from him at 
any time through no fault of his own. 

Fraud in the inception or execution is a defense that 
can be made against a holder in due course provided 
the party sought to be held liable was not negligent in 
putting his name to the paper which he had no inten- 
tion of signing. But it must be clear that some trick 
was worked upon him which would prevent him, as a 
reasonable man, from knowing what he had actually 
signed. Ordinarily one is liable to a holder in due course 



RIGHTS OF TRANSFEREE 191 

if he does not read the paper which he signs, or if he 
does not use due precaution, under all the circum- 
stances, to know what he is signing. This defense is 
also a defense to be often looked upon with great sus- 
picion as it is a very convenient defense for a man to 
make when he has been careless about signing paper, 
or when he is actually willing to falsify about the facts. 

Example 129. A requests B to recommend 
a friend for him for a certain position and hands 
B a paper which he states is such recommenda- 
tion. B signs without reading it. It is in fact 
a promissory note which A afterwards sells to C 
C can compel B to pay this paper as B was care- 
less under the facts. But if A had procured this 
paper by some trick which B as a reasonable 
man would not have avoided, then B's defense 
that the paper was not his act would be good 
against even a holder in due course. 

Minority. A person under age can make his defense 
against the owner in due course. 

Example 130. A, who is sixteen years of age, 
gives his promissory note to B for $100, which 
he then squanders. B sells the paper to C, who 
does not know that A is under age. A can 
make his defense against C when he brings 
suit. Of course C could hold B for the amount 
of the note. 

Material alteration is a defense similar to forgery and 
can be made against a holder in due course. 

Example 131. A makes a note to B for the 
sum of $100. B raises the amount to $1000 
and sells the note to C. A can make the defense 
of alteration but he is liable on the note as 
originally given. 

Where there is a material alteration the original con- 
dition of the instrument may have encouraged altera- 



1 92 BUSINESS LAW 

tion. In some states it is held that if a maker leaves 
uncanceled blanks in the instrument which are sub- 
sequently filled up by one who then sells to' a holder 
in due course, the maker will be liable notwithstanding 
the material alteration on account of his negligence in 
leaving blanks in which words could be written. But 
in other states the courts take the position that leaving 
these blanks uncanceled will not make one liable in 
case of material alteration because, they say, a person 
need not contemplate that a forgery is going to be 
committed upon paper which he issues. It would seem, 
however, that it is not too much to require any one 
issuing negotiable paper to cancel the unfilled blanks 
by drawing a line through. 

In this connection it might be mentioned that use of 
check protectors is not required by law, although often 
so stated. If A issues a check which B afterwards raises 
and then procures payment thereof by the bank, A 
cannot be made to stand the loss of this check merely 
because he did not use a check protector. The bank 
paying the instrument is the real loser unless it can hold 
the party who raised the check, which is usually im- 
possible on account of his financial irresponsibility or 
departure from the community. 

Check protectors are, however, for practical reasons, 
valuable. They enable the drawer of the check to show 
that he was careful, they do in fact keep checks from 
being altered, and for this reason prevent law suits. 

Questions and Problems 

(246) Who is a " holder in due course " ? Why is it im- 
portant for one to prove that he is such? 



RIGHTS OF TRANSFEREE 193 

(247) When is indorsement necessary to constitute one a 
holder in due course ? 

(248) A makes a note to B's order and delivers it to B in 
payment of goods bought by A from B. B indorses the note to 
C, who gives nothing for it. C sues A. Under what circum- 
stances does it become material to A whether C gave anything 
for the note or not ? 

(249) If in the last case there had been fraud in the sale of 
the goods and C had bought the note knowing of this, could A 
have made the defense against C ? Could he if C had not known 
of it? 

(250) Is a negotiable instrument still negotiable after its 
maturity ? Why is it important to a purchaser of a negotiable 
instrument to buy it before it is overdue? When would it in 
fact be unimportant? 

(251) When is demand paper overdue? 

(252) A gives a note to B's order, who procures it by fraudu- 
lent statements as to the consideration. B sells to C, a purchaser 
in good faith, for value and before maturity. C after maturity 
transfers to D. D sues A. Can A make the defense that the 
note was procured from him by fraud ? 

(253) State Example 128. 

(254) State Example 129. 

(255) State Example 130. 

(256) State Example 131. 

(257) Enumerate the defenses which cannot be made against 
a holder in due course. Why are exceptions made in these cases ? 



CHAPTER XXXIV 
LIABILITY OF PARTIES 

CONTRACT OF PARTIES PRIMARILY LIABLE 

Maker of note. The maker of the note is the party 
who ordinarily should pay it. He is the party pri- 
marily liable. He is liable upon the note according 
to its tenor. If the party to whom the note was origi- 
nally given has not performed his part of the contract, 
then, of course, the maker of the note when sued can 
make all of his defenses just as if he were sued upon any 
contractual promise. The fact that the other party 
has secured a negotiable promissory note does not 
allow him to enforce the note if he is himself in default 
on his contractual obligations. The note is, however, 
prima facie evidence of its contents. If the note is 
transferred to a holder in due course, then A becomes 
liable according to the tenor of the note, notwithstand- 
ing the existence of defenses against the party to whom 
he gave the note, as we have seen in the chapter above, 
except those unusual defenses which were therein noted. 

Acceptor of bill. The acceptor of a bill of exchange 
is liable according to the tenor of his acceptance. His 
liability is a primary liability. 

A holder of a bill is entitled to have unqualified accept- 
ance or none at all. He may, however, deem it to his 

194 



LIABILITY OF PARTIES 195 

interest to take a qualified acceptance. An acceptance 
may be qualified as to amount, time of payment or 
other change. If the drawee will not give an unquali- 
fied acceptance and the holder will not take a qualified 
one, the holder may then treat the bill as dishonored 
for non-acceptance. 

CONTRACTS OF PARTIES SECONDARILY LIABLE 

Contract of transferor. We have seen that one who 
holds negotiable paper made by another may transfer 
it in some cases without indorsement, that is, by mere 
delivery, and in some cases with the required indorse- 
ment although in every case whether necessary or not 
the indorsement may be made. Such a party is not 
primarily liable in the ordinary case because in the final 
adjustment the party who made the paper, or was ac- 
ceptor upon it, ought to pay it. This is shown by the 
following example. 

Example 132. A borrows $5000 from B and 
gives B a negotiable promissory note as evidence 
of the indebtedness. B for $5000, less a reason- 
able discount, transfers to C. C buys goods 
from D and in payment thereof transfers A's 
note to D. D holds the note until maturity. 
Obviously the party who ought to pay this note 
is A, who has received $5000 and who has as yet 
given nothing therefor except his note. B has 
received and paid out $5000 and C is also in this 
situation. If either B or C pay the note it 
means that they are out $5000. However, by 
the law of negotiable paper, if A will not pay the 
note when it is presented, B or C must pay it and 
D could hold either B or C as indorsers at his 
option, leaving the party who is thus compelled 
to pay the paper to his recourse against the in- 
dorser above him or against the maker. If the 
maker has become insolvent the indorser will, 
of course, be the only loser. 



196 BUSINESS LAW 

There is a difference between the liability of one who 
indorses and one who transfers negotiable paper with- 
out indorsement. Where it is so transferable by its 
form we may think of a transferor of negotiable paper 
as having a twofold liability. In the first place we 
may liken him to one who sells personal property and 
becomes a warrantor of the title, and in addition to 
this we may think of him as having the liability of an 
indorser of negotiable paper in the cases in which he 
indorses. As a warrantor the transferor of negotiable 
paper warrants it to be genuine and what it purports 
to be, that is to say, not a forgery, that the prior signa- 
tures are genuine and that the prior parties had capacity 
to contract. This is the liability of one who transfers 
with or without indorsement, but if he does not indorse 
his liability only extends to the party to whom he trans- 
fers the paper and not to succeeding transferees. If, 
notwithstanding the paper is transferable by mere de- 
livery, he indorses it, he assumes then in addition the 
liability of an indorser to all succeeding parties. One 
who indorses paper, whether his indorsement is necessary 
or not, assumes to any succeeding holder the liability 
that if the paper is unpaid at maturity by the maker or 
acceptor, or any party prior to him, that he will pay 
the paper to the then holder or to any one subsequent to 
him who has been compelled to pay it to the holder, pro- 
vided the proper steps of presentment for payment, notice 
of dishonor and in some cases protest are taken to charge 
him. But if the indorser adds to his indorsement the 
words " without recourse," then he becomes liable merely 
as one who transfers without indorsement, except that his 
liability as a warrantor extends to all subsequent parties. 



LIABILITY OF PARTIES 197 

Example 133. A makes a note for $1000 
payable to the order of B and delivers it to B. 
B thereupon indorses to C in blank, who trans- 
fers the note without indorsement to D, who 
transfers by indorsement to E adding the words 
" without recourse," who indorses to F. F, the 
holder, presents the paper to A for payment but 
finds that A has become insolvent. F there- 
upon gives notice of the dishonor of the paper 
by non-payment to B, C, D and E. F may in 
this case hold B or E but cannot hold C and 
D. If A had refused to pay the paper because 
he was a minor, or because it was forged, then F 
could have held B or E and also D, but he 
could not have held C because C did not indorse 
the paper. C, however, in that event would 
have been liable to D had D been the holder for 
he warrants the validity of the paper and the ca- 
pacity of prior parties to his immediate transferee. 

Drawer of bill. The drawer of a bill is secondarily 
liable. He is not liable upon the bill unless the bill 
has been presented to the drawee for acceptance in the 
cases in which such presentment is necessary as we shall 
see hereafter, or unless the bill has been presented 
for payment where acceptance is necessary, or where 
being not necessary it has been made. In case this 
presentment for acceptance or payment, as the case 
may be, has been made and notice of dishonor given the 
drawer, and protest properly made in cases in which 
protest is necessary, then the drawer becomes liable 
to pay the paper. 

Drawer of check. The drawer of a check is secon- 
darily liable thereon in case the bank upon which it 
is drawn refuses to pay it. Delay in presenting the 
check for payment or in giving notices to the drawer of 
the check will not excuse him unless he is damaged by 
such delay. 



198 BUSINESS LAW 

In case of certified checks, that is, checks presented 
to the bank for acceptance instead of presented for 
payment, the liability of the drawer of the check is 
discharged if the presentment for certification is made 
by the holder, but if such presentment is made by the 
maker of the check, the maker remains secondarily 
liable as though the check was not certified. The reason 
for this distinction is that if one has a check made by 
another and could have had it paid but instead thereof 
for his own advantage has it certified, he accepts the 
liability of the bank in lieu of the liability of the maker. 

CONTRACT OF ACCOMMODATION PARTIES 

What is accommodation party? An accommodation 
party in the law of negotiable paper is one who lends 
his credit to another by becoming a party to negotiable 
paper for that other. He accommodates the other 
party by lending him his credit. He may sign in the 
capacity of maker, indorser or acceptor/ 

Example 134. A desires to procure credit 
from B, but B will not loan him money unless 
he presents some security or procures a signa- 
ture satisfactory to B. A thereupon asks C to 
sign the paper with him. C agrees to do so for 
the purpose of enabling A to procure the credit. 
C may make a note to A which A can then in- 
dorse to B. He would then be an accommoda- 
tion maker ; or he can make the note as a co- 
maker with A, or he can have A make the paper 
to him and then indorse it to B, or he can have 
A draw upon him for the amount in the form 
of a bill of exchange and then accept the bill. 

Liability of accommodation party. An accommoda- 
tion party is liable to any person who has taken the 
paper upon the faith of his signature, and it is immaterial 



LIABILITY OF PARTIES 199 

whether such party knew him to be an accommodation 
party or not so far as this liability is concerned. He is 
just like a surety or a guarantor of credit ; the money 
was advanced on the faith of his signature and he cannot 
now say that he was a mere accommodation party when 
the purpose of his signature was to enable the party 
receiving the credit to receive that credit. It is there- 
fore the law that an accommodation party is liable to 
any one who has relied upon his signature, whether he 
was known or not known to be an accommodation 
party. 

The accommodation party is not liable to the party 
whom he has accommodated, no matter in what manner 
he signs. Thus supposing A in order to obtain money 
through B makes a note payable to B's order, intending 
that B shall indorse it to any one from whom he can 
procure credit. B now holds the note made by A and 
ordinarily could compel A to pay it, but inasmuch as 
the purpose of the note was that of mere accommoda- 
tion B cannot force A to pay the money to him or to 
loan him the money, as that was never the intention. A 
can therefore plead lack of consideration as far as B is 
concerned. 

ACCEPTANCE AND PAYMENT FOR HONOR 

Acceptance for honor. " Acceptance for honor " is 
an acceptance of a bill of exchange by one not named 
therein as drawee for the " honor " of some party to 
the bill. The acceptance may be for the honor of any 
party to the bill, but if not otherwise expressed, it is 
presumed to be for the honor of the drawer. It is 
allowable when a bill not yet overdue has been protested 



200 BUSINESS LAW 

for non-acceptance. It is also called " acceptance supra 
protest.'' 1 

An acceptor for honor differs from an accommoda- 
tion acceptor in this fashion. The accommodation 
acceptor is named in the bill as a party thereto. An 
acceptor for honor is otherwise a stranger to the bill 
and steps in for the benefit of some party thereto to 
save that person's credit. 

The acceptor for honor becomes liable on the bill 
according to the tenor of his acceptance to all persons 
subsequent to the party for whose honor he makes the 
acceptance. 

Payment for honor. " Where a bill has been pro- 
tested for non-payment, any person may intervene and 
pay it supra protest for the honor of any person liable 
thereon or for the honor of the person for whose account 
it was drawn." (Neg. Inst. Act., Sec. 171.) 

The payment for honor after protest must be attested 
by a notarial act of honor, appended to the protest or 
forming an extension thereof. Otherwise the payment 
will operate as a mere voluntary payment, that is, give 
no right of reimbursement. 

Where a bill has been paid for honor, all parties sub- 
sequent to the one for whose honor it was paid are dis- 
charged from liability, but the payee for honor succeeds 
to the rights and duties of the holder as regards the 
party for whose honor he pays and all parties liable to 
the latter. 

Questions and Problems 

(258) What is the contract of a maker of a note? 

(259) What is the undertaking of an acceptor of a bill ? 



LIABILITY OF PARTIES 201 

(260) A makes a note to B, which B indorses in blank to C, 
who without indorsement delivers it to D, who indorses it with- 
out recourse to E. A does not pay this paper when it is mature 
and asserts that being under age he will not pay it. E asks you 
to advise him what rights he has against B, C and D. How 
would you reply? Assume that all the indorsers have been 
given due notice of dishonor. 

(261) What is the liability of a drawer of a bill? What is 
the liability of a drawer of a certified check ? 

(262) Who is an accommodation party ? What is his liability ? 

(263) What is " acceptance for honor " ? payment for honor? 



CHAPTER XXXV 

PROCEDURE TO CHARGE PARTIES SECONDARILY 

LIABLE 

GENERAL STATEMENT 

We have seen that parties to negotiable paper may 
be primarily liable, that is, liable at once upon maturity 
as the parties who have undertaken to pay the debt ; 
and parties secondarily liable, that is, liable only upon 
the failure to pay of the party primarily liable. The 
classification is not arbitrary, but rests in the justice 
and nature of the case. Persons primarily liable are 
makers of notes and acceptors of bills or checks. They 
engage to pay when the instrument is presented for 
payment at or after maturity and are (usually) the 
real debtors. Parties secondarily liable are drawers of 
bills and checks and indorsers of bills, notes and checks. 
They are liable only upon the failure to pay of the party 
who is primarily liable. And having paid, they have 
their recourse against the party who is primarily liable 
and who should have paid, although on account of insol- 
vency or for other reasons their right may be of little 
value or be discharged by bankruptcy. 

For the reason that parties secondarily liable are 
liable in lieu of some one else who should have paid, the 
law provides for their protection by strict rules. Their 



CHARGE PARTIES SECONDARILY LIABLE 203 

liability being of a secondary or contingent sort, the 
law establishes rules which must be strictly observed 
to fasten this liability upon them. There is a certain 
procedure to be followed. We will now notice what 
must be done. 

PRESENTMENT FOR PAYMENT 

The requirement stated. Presentment for payment 
to the party primarily liable at the time, at the place 
and in the manner provided by law is necessary to 
charge the party secondarily liable, unless such step is 
excused or waived by the party entitled to it. 

Example 135. A makes a note to B's order 
which B indorses to C. In order to hold B as 
indorser, C must present this note to A for pay- 
ment at the time and place and in the manner 
provided by law, unless B waives the right or C 
is excused by some circumstance regarded by 
law as an excuse. If this step is omitted B is 
discharged, as the law regards that if the note 
had been so presented it might have been paid, 
or at least B, being informed by the further 
step of notice of dishonor, would have been 
able to take immediate steps to protect him- 
self in his rights against A. 

Bear in mind that this presentment for payment to 
the party primarily liable is required only for the benefit 
of the party secondarily liable. Presentment for pay- 
ment is not required to fix liability of the party pri- 
marily liable. His liability already exists. 

Date of presentment for payment. The holder must 
present the paper for payment upon the date of its 
maturity. Papers mature on the date therein stated, 
without grace. Formerly three days of grace were 
allowed, but these have generally been abolished. 



204 BUSINESS LAW 

Demand paper matures within a reasonable time after 
its issue. But in case of a bill of exchange presentment 
for payment will be sufficient if made within a reason- 
able time after the last negotiation thereof. 

If paper falls due on Sunday or a holiday, the paper 
is not mature until the next succeeding business day. 
Instruments falling due on Saturday are to be pre- 
sented on the next succeeding business day except that 
paper payable on demand may at the option of the 
holder be presented before 12 o'clock noon on Saturday 
where that entire day is not a holiday. 

Hour of presentment for payment. Presentment for 
payment must be made at a reasonable hour on the 
business day of maturity. If the paper is by its terms 
payable at a bank, presentment must be made during 
banking hours, except where the person to make pay- 
ment has no funds there to meet the paper at any time 
during the day, presentment may be made at any hour 
before the bank closes. 

Presentment to whom. The presentment of the 
paper must be made to the person primarily liable, or 
to his agent in that behalf. If such person is absent or 
inaccessible, presentment may be made to any person 
found at the place where the presentment is made. If 
the person primarily liable is dead, and no place of 
presentment is specified, presentment for payment must 
be made to his administrator or executor, if such there 
be, and if with the exercise of reasonable diligence he 
can be found. If there are two or more persons pri- 
marily liable as partners, and no place of payment is 
specified, presentment may be made to any one of them, 
even if the partnership has been dissolved, but if they 



CHARGE PARTIES SECONDARILY LIABLE 205 

are not partners presentment must be made to them all, 
unless a place of payment is specified. 

Place of presentment for payment. Presentment for 
payment is properly made for the purpose of charging 
the parties secondarily liable, 

(1) where place of payment specified, and there 
presented ; 

(2) where no place specified, but address of person 
to make the payment is given, and there presented ; 

(3) where no place specified and no address given, 
and presentment is made at the usual place of business 
or residence of the person to make payment ; 

(4) in any other case, to the person to make payment 
wherever he can be found, or at his last known place 
of residence or business. 

Manner of presentment. The paper must be ex- 
hibited and, when paid, delivered up. 

Presentment at maturity excused. Presentment for 
payment at maturity is excused, and the liability of 
parties secondarily liable fixed without presentment 
when delay is caused by circumstances beyond holder's 
control, but when cause ceases to operate, presentment 
must be made with reasonable diligence. 

Presentment is not required when after exercise of 
reasonable diligence it cannot be made, when (in order 
to charge the drawer) the drawer has no right to ex- 
pect that the instrument will be paid, and when the 
drawee is a fictitious person. 

Waiver of presentment for payment. The party 
secondarily liable may waive the right to have present- 
ment for payment, and this waiver may be embodied 
in the instrument or above his indorsement, or it may 



2o6 BUSINESS LAW 

be implied from the circumstances, and whether express 

or implied, may be made before or after the date of 

presentment. 

Example 136. A gives a note in which it is 
provided that the " indorsers waive present- 
ment for payment, protest and notice of dis- 
honor." B indorses this note to C. C can 
hold B as indorser, although C does not present 
the note to A for payment. 

NOTICE OF DISHONOR 

The requirement stated. When a negotiable in- 
strument has been dishonored by non-acceptance or 
by non-payment (having been duly presented for 
acceptance or payment), the parties secondarily liable 
(drawers and indorsers) are discharged unless they are 
given notice of dishonor at the time, place and in the 
manner required by law, unless the circumstances are 
such that the notice is for that reason dispensed with 
or unless the party entitled to the notice waives it. 

Example 137. A draws a bill of exchange 
upon B, in favor of C, or order, which C in- 
dorses to D. D presents it for acceptance to 
B, and B refuses acceptance. D must give A 
and C due notice of this dishonor by B in order 
to hold A as drawer and C as indorser, unless 
circumstances dispense with notice or the right 
to receive notice is waived. Had B accepted 
and then afterwards at maturity refused pay- 
ment, the same reasoning is to be made. 

Example 138. A, for value received, makes a 
note to order of B and B indorses to C. C pre- 
sents it to A for payment, which is refused. B 
is not liable if he is not given due notice of dis- 
honor unless excused or waived. 

When notice of dishonor must be given. 

(i) Where parties giving and receiving notice reside in 
same place. 



CHARGE PARTIES SECONDARILY LIABLE 207 

(a) If given at place of business, before close of busi- 
ness hours on day following dishonor. 

(b) If given at residence, before usual hours of rest 
on day following dishonor. 

(c) If sent by mail, it must be mailed in time to arrive 
in usual course upon day following dishonor. 

(2) Where parties giving and receiving notice reside 
in different places. 

(a) If sent by mail, it must be deposited in time to 
go by mail on day following dishonor. 

Q>) If not sent by mail, it must be given within the 
time it would have arrived by mail if so given. 

(3) Miscarriage in the mails does not excuse parties 
secondarily liable where notice was properly mailed. 

(4) A party receiving notice has the same time in which to 
give notice to prior parties liable to him as he had in 
which to receive notice. 

Place at which notice of dishonor must be given. 

(1) If address given with his signature, then to that 
address. 

(2) If no address given, then either to post office 
nearest his residence or post office where he is accus- 
tomed to receive mail. 

(3) If no address given, and he resides at one place 
and has a place of business elsewhere, then to either 
place. 

(4) If sojourning elsewhere, then the notice may be 
sent to the place of sojourn. 

Manner of giving notice of dishonor. Notice of 
dishonor should, as a matter of good practice, be given 
in writing and signed, but it is sufficient legally if not 
in writing, and if in writing if not signed or if the writ- 



208 BUSINESS LAW 

ing is incomplete and further supplemented by oral 
communication. The instrument should be described, 
but a misdescription does not vitiate the notice unless 
it actually misleads. 

To whom notice of dishonor may be given. Notice 
of dishonor may be given either to the party himself 
or to his agent in that behalf. If the party, to the 
knowledge of the giver, is dead, the notice must be given 
to the executor or administrator, if there is one, and he 
can by reasonable diligence be found. If none, then 
the last residence or last place of business of the de- 
ceased. If the parties to be notified are partners, notice 
may be given to any party. If they are not partners, 
notice must be given to each unless one of them has 
authority to receive notice for the others. If a party 
has become bankrupt or insolvent, notice may be 
given either to the party himself or his trustee or 
assignee. 

Waiver of notice of dishonor. Notice of dishonor 
may be waived by any party entitled to it either before 
or after the time for giving notice. This waiver may be 
express or inferred from the conduct of the parties. If 
a waiver is embodied in the instrument, it binds all 
parties to the instrument, but if written above the sig- 
nature of any indorser it binds him only. 

Notice of dishonor is dispensed with when, after the 
exercise of reasonable diligence, it cannot be given or 
does not reach the parties sought to be charged. 

Delay in giving notice of dishonor is excused when 
caused by facts beyond control of holder. When the 
cause of delay ceases, notice must be given with reason- 
able diligence. 



CHARGE PARTIES SECONDARILY LIABLE 209 



PROTEST 

This requirement stated. A bill of exchange which 
appears on its face to be a foreign bill (i.e. either drawn 
or payable or both drawn and payable in another state) 
must, in order to hold parties secondarily liable (drawers 
and indorsers) be protested in all cases in which it is 
dishonored by non-acceptance or non-payment except 
where protest is excused or waived. Protest is not 
necessary except in case of foreign bills. 

Example 139. A merchant in Chicago draws 
a bill of exchange upon a merchant in New York 
in favor of C, or order. C indorses it to D. 
D applies to the New York merchant for accept- 
ance of the bill. The New York merchant will 
not accept. D must protest the bill for non- 
acceptance in order to hold C or the drawer. 
If the bill were presented for payment where it 
had not been previously dishonored by non- 
acceptance, and payment were refused, there 
would have to be protest for non-payment. 

Essentials of protest. The protest must be annexed 
to the bill or must contain a copy thereof ; must be 
under the hand of the seal of the notary making it and 
must specify time and place of presentment ; the fact 
of presentment ; the manner thereof ; the cause or 
reason for protesting the bill; the demand made and 
answer given, if any; or the fact that the drawee or 
acceptor could not be found. 

By whom protest may be made. Protest is usually 
made by a notary public, but it may be made by any 
respectable resident of the place where the bill is dis- 
honored, in the presence of two or more credible 
witnesses. 



210 BUSINESS LAW 

Time of protest. A bill must be protested on the day 
of its dishonor unless delay is excused by the facts which 
legally excuse protest. 

Place of protest. A bill must be protested at the 
place where it is dishonored, except that when a bill 
drawn payable at the place of business or residence of 
some person other than the drawee has been dishonored 
by non-acceptance, it must be protested for non-pay- 
ment at the place where it is expressed to be payable. 

Protest for better security may be made whenever the 
acceptor has been adjudged a bankrupt, or insolvent or has 
made an assignment for creditors before the bill matures. 

Waiver of protest. Protest may be waived in the 
same manner as presentment and notice of dishonor 
may be waived. 

Protest is dispensed with by any circumstances which 
would dispense with notice of dishonor. 

Delay is excused when caused by circumstances beyond 
the control of the holder. When the cause of the delay 
ceases to operate, the bill must be protested with reason- 
able diligence. 

Questions and Problems 

(264) Why does the law provide for certain steps to be taken 
to fix the liability of parties secondarily liable upon negotiable 
paper? What parties are secondarily liable? what parties pri- 
marily liable? Why this distinction in their liability? 

(265) What is meant by presentment for payment? Is it 
necessary in order to charge a party primarily liable ? secondarily 
liable? 

(266) Upon what date must presentment for payment be 
made ? What is the rule in demand paper ? 

(267) What will be the date for presentment for payment if 
paper falls due on a holiday? on Sunday? on Saturday? 



CHARGE PARTIES SECONDARILY LIABLE 21 1 

(268) At what hour must presentment for payment be made ? 

(269) At what place should paper be presented for payment ? 

(270) In what manner is paper presented for payment ? 

(271) What will excuse presentment for payment? 

(272) May the right to have presentment be waived? 

(273) What is meant by " dishonor " of a negotiable instru- 
ment? 

(274) To whom must notice of dishonor be given ? 

(275) Within what time must notice of dishonor be given ? 

(276) A mails to B, an indorser, notice of dishonor. The 
notice is properly stamped and addressed but is lost in the mails 
and never reaches B. B does not actually learn that the note is 
unpaid until several weeks later. Can he be held? 

(277) At what place should notice of dishonor be given ? 

(278) Can notice of dishonor be orally given? Suppose 
that it does not accurately describe the paper, would it be suffi- 
cient ? 

(279) Can notice of dishonor be given to the party's agent? 
What is the rule where the party entitled to notice is dead? 
bankrupt ? 

(280) May notice of dishonor be waived? 

(281) When will necessity of notice of dishonor be dispensed 
with? 

(282) What is protest ? when necessary ? 

(283) What are the essentials of protest? 

(284) By whom may it be made? at what time and place? 

(285) What is protest for better security? 



CHAPTER XXXVI 
DISCHARGE OF NEGOTIABLE PAPER 

MEANING OF DISCHARGE 

Negotiable paper is discharged when by reason of 
payment or some other fact it loses its effect as a legal 
obligation. If the paper itself is discharged all parties 
thereto are thereby discharged of liability thereupon, 
but certain parties may be discharged while the paper 
still remains in force as to other parties. 

DISCHARGE OF THE PAPER ITSELF 

Discharge by payment. The payment by the maker 
of a note or the acceptor of a bill will discharge the 
paper because in such case the debtor has paid the 
obligation and it therefore ceases to exist. If, however, 
a party secondarily liable pays it, the paper itself is 
not discharged because that party has the right to sue the 
parties above him on the paper. 

Payment of party accommodated. If a party who is 
accommodated pays a paper, no matter in what capacity 
he appears upon the paper, the paper is thereby dis- 
charged, for it is paid by the real debtor. Thus, suppose 
A makes paper for B's accommodation, payable to B 
and by B indorsed to C. B is here the real debtor and 
should pay the paper when it matures. If he does so 
the paper is thereby discharged, notwithstanding he 

212 



DISCHARGE OF NEGOTIABLE PAPER 213 

appears in the capacity of an indorser and A in the 
capacity of a maker. 

By intentional cancellation by the holder. A person 
who has paper may destroy it or cancel it intentionally, 
and if he does this the obligation is thereby discharged 
and he cannot thereafter reconsider what he has done 
with the effect of recreating the obligation. 

By acquisition of the paper at or after maturity by the 
principal debtor. This amounts to a payment of the 
paper and therefore discharges it. 

DISCHARGE OF PARTIES SECONDARILY LIABLE 

In general. A party secondarily liable may be dis- 
charged from liability on the paper while the paper 
itself remains in force and effect. 

In fact we have seen that the holder must take affir- 
mative steps to fix upon the party secondarily liable 
his liability. The most common cause of discharge 
of a party secondarily liable is the failure to present for 
payment, give notice of dishonor and have the instru- 
ment protested as we have heretofore seen, but the 
party secondarily liable may be discharged in other 
manners, which we will briefly intimate. 

Party secondarily liable discharged by failure to 
properly present for payment, give notice of dishonor 
and make protest. These steps we have considered at 
length elsewhere. 

Intentional cancellation of signature by holder. If 
the holder intentionally strikes out the signature of any- 
one secondarily liable, such party is thereby discharged. 

By valid tender of payment by prior party. A party 
secondarily liable will be discharged from his liability 



214 BUSINESS LAW 

to the holder if some party prior to him has made a 
valid and sufficient tender of the amount due, for the 
simple reason that if the holder at one time could have 
secured the payment of the paper by taking a properly 
made tender of the amount due, he cannot now hold a 
party who is only secondarily liable. The loss is the 
fault of the holder and should not be fastened upon any 
indorser or drawer. 

By release of principal debtor. If a holder releases 
a principal debtor he thereby will release the party 
secondarily liable unless he expressly stipulates against 
this. 

By extension of time of payment. If the holder 
extends the time of payment without the consent of the 
party secondarily liable, he will release the party secon- 
darily liable unless he expressly reserves his right against 
him. This does not mean that the mere failure to bring 
suit when paper is mature will operate to discharge the 
party secondarily liable, but means that if the holder 
by agreement expressly extends the time of the paper, 
the indorser may say that if such extension had not been 
made the paper might have been paid. Therefore he 
should not be made to suffer. 

Questions and Problems 

(286) What is meant by discharge of negotiable paper? 

(287) In what ways may paper be discharged? 

(288) In what ways may parties liable upon paper be dis- 
charged? 



PART VI 
BUSINESS ASSOCIATIONS 

CHAPTER XXXVII 
PARTNERSHIPS — THEIR NATURE AND FORMATION 

PARTNERSHIP DESCRIBED 

Business associations. To conduct a business of any 
considerable magnitude requires combination of effort. 
Experience has suggested three general classes of co- 
operation in business endeavor : (i) through the device 
of agency; (2) through association in common owner- 
ship, known as partnership ; (3) through the medium 
of an artificial person, known as a corporation. 

The law of agency we have thought profitable to dis- 
cuss in a former part of this book as having a large appli- 
cation and a more fundamental bearing in the fact that 
whatever one may do he may do through another, 
be it an isolated act or a line of business. One seldom 
carries on a business merely by the establishment of 
agencies, and on the other hand, men who form partner- 
ships or corporations have need of agents to represent 
such partnerships or corporations. 

The uniform partnership act. A law to make uni- 
form the law of partnership, has been recommended to 
the various states for passage by the Commissioners on 

215 



21 6 BUSINESS LAW 

Uniformity of State Legislation ; and it has been adopted 
in a number of states. It preserves the common law 
theory of a partnership as a collection of individuals 
under an agreement for cooperation in business for 
profit rather than an entity, but it allows real estate to 
be held and transferred in the partnership name and 
makes an incoming partner liable for past debts of the 
firm. Both of these are innovations in the law of part- 
nership and are upon the entity theory. 

Partnerships defined. A partnership may be defined 
as an association of two or more persons, formed to 
carry on, as co-owners, a business for profit. It will be 
noticed in this definition that a partnership is merely 
an association, not, like a corporation, having separate 
legal existence in itself as a unit. It will be further 
noticed, and we shall understand more fully hereafter, 
that the members of the partnership are mutual 
owners of the business, each one being of equal dignity 
and importance with the others. In the third place, 
we notice that the enterprise must be conducted 
with a view to profit. Associations, clubs, lodges, 
and mutual benefit associations of all sorts are not 
partnerships. 

Sharing in profits not enough to create partnership. 
A partnership must be with a view to profit, but an 
association formed for the purpose of sharing in profits 
is not necessarily a partnership. It was at one time 
held that if parties were associated together under an 
agreement to share the profits of the enterprise, they 
were partners, and that if loss occurred each would 
have to stand his share of such loss as a partner in the 
venture. But as further cases came before the court, it 



PARTNERSHIPS 217 

was found to be unsound and unjust to apply such a 
test, and the law developed to the effect that in order 
to constitute a partnership there must be more than a 
mere arrangement to divide the profits ; there must 
further be an intention to have a mutual ownership of 
the business carried on by the parties for mutual profit. 
A few examples will make clear the fact that the mere 
arrangement to share profits does not create a partner- 
ship, and therefore the losses, if they occur, cannot be 
put upon all of the parties. 

Example 140. A has a factory for the manu- 
facture of machinery. He desires a manager and 
off ers B a position under a contract that B shall 
have one half of the net profits. B undertakes 
the duties and the concern enters into various 
contracts. A creditor sues A and B as partners. 
B is not liable in such a suit and the case must 
be dismissed as to him unless the parties had 
made representations by which creditors would 
naturally believe that they were partners. 
Something more is needed here to create B a 
partner in this venture. He is like any other 
employee except that his compensation de- 
pends upon the amount of profit, but it is con- 
trary to the intention of the parties that he 
should be held for any losses. 

Example 141. A owns property and rents 
it to B under a contract by which B is to pay A 
as rent one fourth of whatever profits B shall 
make in his business. In this case both parties 
are interested in the profits of the enterprise, 
but they are not partners as B is the sole owner 
of the business and A has absolutely no interest 
or control therein. A would not be responsible 
for B's debts, nor could A be made to account to 
B for any share of losses which might occur. 

These examples and others that might be given in 
other situations illustrate the fact that profit sharing, 
while an essential element in a partnership, is not in 



2l8 BUSINESS LAW 

itself enough to impress upon a business arrangement 
the character of partnership. 

Partners are mutual owners. The true test of a 
partnership is determined by the question whether the 
alleged members have made a contract by which they 
intended to associate themselves in business as mutual 
owners of that business with a view to profit. If they 
have done so they are partners and not only entitled to 
share in the profits, but must mutually sustain losses 
in such proportion as between themselves as they have 
agreed upon, although as to third parties, each one is 
personally liable for the entire debt. 

Example 142. A has $5000 idle money. B 
owns a dry goods store and C is an expert dry 
goods salesman. A proposes that the three 
go into the dry goods business together under 
the firm name of A, B and C ; A to contrib- 
ute $5000, B to contribute his stock in trade 
and C to contribute his services ; all to share 
equally in the profits. The firm enters in busi- 
ness, employing clerks and agents. Debts are 
created and the firm fails. B and C become 
individually insolvent. A, who is a capitalist, 
can be made to pay all of the debts of the firm. 
The same would be true of B or C were either 
of them the solvent party. Were A, B and C 
all solvent after the failure of the firm they 
would as to each other have to share equally 
in the losses. Had A and B merely employed C 
upon a salary, or even upon an agreement to 
share in the profits, C would not have been a 
partner in the firm so long as there was no 
intention to constitute him a mutual owner 
having a voice in the affairs of the firm and a 
principal's interest therein. 

As a result, partners all liable as principals. Because 

the partners are co-owners of the business as a result 
of the carrying out of their intention to be such co- 



PARTNERSHIPS 219 

owners, each one is a principal in the business and 
liable as a principal for all acts done, contracts made 
and debts incurred by himself or his associates for the 
benefit of the partnership and within the actual or ap- 
parent scope of the partnership activity. This will be 
more fully discussed under the subject of the authority 
of the partner. 

Partnerships as to third persons. In the discussion 
of agency we noticed that a person may be bound as 
principal by the act of another person as his agent in 
cases in which he has acted in such a manner as to 
create a reasonable basis for a belief that such other 
person is his agent, though in fact he is not. The same 
rule obtains in regard to the law of partnerships in which 
members are agents of each other. One may be held 
for the debts of another as his ostensible partner when 
as between the parties no partnership arrangement exists. 
This is variously called partnership by estoppel, partner- 
ship as to third persons, ostensible or apparent partner- 
ship. It is only a further extension of the principle that 
holds one who is actually a partner for acts of his co- 
partners which are in excess of their real authority, but 
not of their apparent authority. 

Partnerships are on personal basis. It is elementary 
in the law of partnerships that the relationship is purely 
personal. A person will not be forced into a partner- 
ship with another. Right to choose the associate is 
fundamental. This doctrine is expressed in the words 
" delectus persona." On account of this doctrine, an 
attempted transfer by one partner of his share without 
the consent of the other member or members of the 
firm cannot operate to confer upon the transferee any 



220 BUSINESS LAW 

right to be a member of the firm. Corporations differ 
in this regard. Shares in them are freely transferable 
and death of a shareholder does not affect corporate 
existence. 

KINDS OF PARTNERSHIPS 

Limited partnerships. A partnership is said to be 
limited when under the operation of some statute it is 
permitted to have members whose liability to creditors 
is limited to an amount subscribed. Such partnerships 
are not common, as incorporation is usually resorted to 
in cases in which liability is sought to be limited. 
Formation of a partnership under such a statute re- 
quires strict compliance with the terms thereof as to 
publication, recording Articles of Partnership, etc. 

An act to make uniform the law relating to limited 
partnerships has been adopted by the Commissioners 
on Uniformity and has already been adopted by some of 
the states. This act provides that a limited partner- 
ship shall have one or more limited and one or more 
general partners. It provides that such a partner- 
ship may be formed by the execution of a certificate set- 
ting forth the name, business, place of business, the name 
and residence of the partners, designating which general 
and which special, the term, the amount of cash and the 
agreed value of other property contributed as capital, 
and other provisions. This certificate must be properly 
recorded. The rights and powers of the members of 
the firm are indicated, but it is not advisable for us to 
inquire into them at length here. 

Joint stock companies. A joint stock company is 
a company whose organization is similar to that of a 
corporation, except that it has no charter from the state. 



PARTNERSHIPS 221 

It is in substance a partnership, and its members are 
liable to creditors as partners notwithstanding they 
may be thereby compelled to pay more than they have 
subscribed. 

Example 143. A, B and C decide to form a 
business to which each is to contribute the sum 
of $5000, and which shall be governed by a set 
of by-laws, which provides for the issue of trans- 
ferable shares to each subscriber, that' no sub- 
scriber shall be liable for more than the amount 
for which he subscribes and that there shall be 
officers known as President, Secretary and 
Treasurer. No attempt is made to secure a 
charter from the state under the incorporation 
law. The firm becomes heavily indebted. Its 
creditors may sue the members as their debtors 
and enforce liability against any member as in 
ordinary partnership cases, leaving such member 
to have his contribution from the others, as he 
may be able to secure it. 



KINDS OF PARTNERS 

An ostensible partner is a person who allows himself 
to be held out as a partner, and may be really a partner 
or merely an apparent one. He is also called an ap- 
parent partner. Such persons are liable to creditors 
who rely upon the appearance of partnership whether 
the partnership is actual or merely apparent. 

A silent partner is one who has no voice in the firm. 
He may be apparent or secret. 

A secret partner is one, whether silent or not, whose 
connection with the firm is kept secret by himself and 
the firm. He is liable to creditors if they discover his 
true relationship to the firm, but only to creditors who 
become such while he is actually a partner. 

A dormant partner is one who is both secret and silent. 



222 BUSINESS LAW 

THE PARTNERSHIP CONTRACT 

In general. As we have seen from the definition of 
the partnership, it is a relationship arising out of con- 
tract. It has no charter from the state, and comes into 
being by mere agreement and may be dissolved at any 
time by mere agreement. It is not essential, although 
highly advisable, that the contract be in writing. It is 
not infrequent in smaller ventures that the parties have 
no written contract, merely an oral understanding to 
share profits and losses. 

The Articles of Partnership. The written agreement 
of partnership between the parties is formally known 
as the Articles of Partnership. It sets forth that the 
parties have agreed to form and do thereby form a 
partnership for purposes named, under a certain firm 
name or style, with the duration, the capital to be con- 
tributed by each, the manner in which it may be con- 
tributed (whether in money, property or services), 
the times and manner of dividing profits, the limita- 
tions, if any, upon the powers of particular members, 
the manner and effect of dissolution and such other 
items as may be desirable in any particular case. 

THE FIRM NAME 

What firm name may be. The firm name may be 
any name agreed upon by the partners, whether fanci- 
ful or not. It may include the names of any of the 
partners, or all of them, or none of them. It may, 
unless there is a statutory law forbidding, be purely 
fanciful and of the kind usually adopted by corporations. 
Thus, " Brown and Co." ; " The General Tea Store " ; 



PARTNERSHIPS 223 

" The John Brown Company " ; " Smith, Jones and 
Brown Tea Store Company," would all be good partner- 
ship names no matter how many partners may exist 
in those firms. 

Statutory provisions as to name. Some states have 
statutory provisions as to names which must be observed. 
For instance, in several states if a partnership name 
does not disclose the names of all the partners, the names 
of those partners must be publicly recorded. 

The name as property asset. Every person knows 
that the name of a company, incorporated or unincor- 
porated, may be its most valuable asset. That name 
may become the identifying label of the good will of 
the firm. Destroy all of its tangible assets and yet its 
most valuable asset — its name — would remain and 
enable rebuilding of its business comparatively easily 
and in a short time. The integrity of the firm, its repu- 
tation for honesty, fair dealing and other qualities, 
the habit of customers in trading with it, are all pro- 
tected by its name. Accordingly a court of equity will 
prevent by injunction the usurpation of its name by 
competitors who thereby strive to acquire a part of its 
trade. 

THE FIRM CAPITAL AND PROPERTY 

Capital defined. The capital of the firm is the amount 
of money or property put in the firm by agreement, as 
the fund with which it is to carry on its business. Tech- 
nically the terms " firm capital " and " firm property " 
are not synonymous, as, strictly speaking, " capital " is 
contributed wealth for the purpose of creating property 
and money with which to carry on business, while 



224 BUSINESS LAW 

" property" is anything which may be owned by the 
firm. 

The subjects of Interest upon Capital, Rights upon 
Dissolution, and the like, are considered elsewhere. 

What constitutes firm property. Anything is firm 
property which is purchased with firm funds or contrib- 
uted from any member. It may consist in real estate 
or chattels or money. For legal reasons, and with re- 
sults we cannot inquire into here, all property of the 
firm is considered for firm purposes to be in the nature of 
personal property. 

Nature of partner's interest in firm property. The 
partner's interest in the property of the firm is in the 
nature of a common ownership peculiar to itself. He 
has no ownership to any particular part of the property 
to the exclusion of the other members of the firm. They 
all, together, own it, and the right of each partner upon 
dissolution is not to have any particular property, 
whether he originally contributed it or not, but to have 
his share of the surplus, if any, after the partnership 
debts are paid. 

The Uniform Partnership Act deals with the subject 
of partnership real estate specifically. It makes some 
changes in the common law and calls the tenure tenancy 
in partnership. It recognizes ownership of record in 
the partnership name, which is a novelty in the law of 
partnership; but the scope of our text will not permit 
discussion of this point. 

Questions and Problems 

(289) What are the three general forms of business association? 

(290) What is the Uniform Partnership Act? Explain its 



PARTNERSHIPS 225 

origin and purpose. What other uniform laws have been drafted 
covering subjects so far covered in this work? 

(291) Define a partnership. 

(292) Must a partnership be a venture for profit? Will a 
mutual interest in the profits of any venture create in itself a 
partnership ? Why ? 

(293) A, desiring more capital for his retail hat business, 
applies to B for funds. After discussion B agrees to let A have 
$5000 if A will pay him 5 per cent of the net profits of the business 
for the use of the money. C afterwards sells goods to A, who, 
before paying C, fails in business. C then learns for the first 
time of the arrangement with B, and now seeks to hold B as a 
partner. Is B liable to C ? Why? 

(294) State Example 140. 

(295) State Example 141. 

(296) What is the true test of a partnership ? 

(297) If A, B and C are partners, upon what theory is A re- 
sponsible for what B does in the line of the partnership business? 

(298) What is partnership by estoppel or as to third persons? 

(299) Define a limited partnership. What law has been 
drawn up to cover the subject? 

(300) Define a joint stock company. Suppose that a hundred 
persons form such a company with by-laws which set forth that 
the members shall not be liable beyond the amount subscribed 
by them. The company fails. Are the individual members liable 
to creditors beyond the amount subscribed by them? 

(301) Define ostensible partner; silent partner; secret 
partner ; dormant partner. 

(302) What are the " Articles of Partnership " ? 

(303) Must the partnership include the names of all the 
partners? 

(304) What is the firm capital? How does it differ from the 
property of the firm? 



CHAPTER XXXVIII 

PARTNERSHIPS (CONTINUED). RIGHTS OF PART- 
NERS AMONG THEMSELVES 

GOOD FAITH BETWEEN PARTNERS 

General statement. A partnership is founded upon 
the basis of personal confidence. One can readily 
understand the fact that entering into a partnership 
with another is an act involving the closest communi- 
cation, personal contact and opportunity to use one's 
position for great benefit or great harm. Clearly one 
would not enter a partnership with another unless 
he had the highest faith in that other's honesty and 
straightforwardness. Because this is the prime req- 
uisite in fact, it has been made the prime requisite in 
law. It is fundamental that the partners must observe 
good faith toward each other, and we will see in the 
following paragraphs some of the commoner applica- 
tions of this rule. 

Partner cannot compete. One partner cannot compete 
with the firm without the consent of the other partners. 
If a partner were allowed to compete with his firm the 
temptation would be to oppose his own interests to 
those of the firm and make the entire profit in any 
transaction for himself rather than bring it in as a 
partnership act involving the division of the profit with 
others. Consequently, if one partner attempts to com- 

226 



PARTNERSHIPS 227 

pete with his firm the law will consider that the act 
done by him in competition was really done for the 
benefit of the firm and will give to the partnership all 
the benefit of that act. But if, in his attempt at compe- 
tition, he loses money, inasmuch as he is engaged in 
wrongdoing he must bear any loss that occurs. Further- 
more, a court of equity will enjoin a partner from further 
acts of competition with the firm. 

Partner's right to deal with firm. The partner has 
no right to buy from the firm or to sell to the firm except 
upon the knowledge by the other members of the firm 
that he is so acting. For if he were allowed to sell to 
the firm without the knowledge of the firm that he is 
the seller, his temptation would be to get the highest 
price possible. So he cannot buy from the firm for the 
reason that his temptation would be to buy at the 
lowest price possible. Sales are often made by partners 
to partnerships, and by partnership to partners with 
the consent of the other members of the firm, but secret 
dealings of this sort are not allowed. 

Partnership benefits acquired by partners. Any 
benefit to which the partnership may be entitled cannot 
be acquired by a partner against the wishes of his asso- 
ciates. Anything acquired by him which may be 
rightfully considered a partnership right will be de- 
clared by the court to be held by the partner for the 
benefit of the partnership. 

RIGHTS OF COMPENSATION — INTEREST, ETC. 

Right to interest on capital. Capital is put into a 
partnership not as money loaned but for the purpose of 
securing profits in lieu of the interest which one might 



2 28 BUSINESS LAW 

obtain by loaning his money. Accordingly a partner 
cannot claim interest upon his money. True, if he loans 
money to the firm, he may contract for interest the same 
as any other person, but he cannot expect to have both 
his chance of profit and right to interest upon his money 
invested by him as principal. 

Right to compensation for services. While it is 
frequently agreed that one partner may have a certain 
amount of compensation from the firm in considera- 
tion of giving his services, in addition to the profits 
or dividends which the business is expected to pay, 
there is no right to compensation for services to be 
implied, for it is assumed that the partner is putting 
in his efforts in expectation of his share of the profit 
which he hopes to realize from his efforts. 

Questions and Problems 

(305) Why is a good faith between partners regarded as so 
essential? 

(306) A, of the firm of A, B and C, sets up a competing busi- 
ness. He makes a profit. What can B and C do ? 

(307) Has the partner a right to deal with the firm ? Explain. 

(308) The firm of A, B and C operate a hotel with a lease 
expiring upon the same date affixed in the partnership articles 
as the time to which the partnership will run. A secretly renews 
the lease. B and C bring suit to have it declared for their common 
benefit. What will the court decide? Why? 

(309) Has a partner a right to interest on capital? 

(310) A firm is composed of A, B and C. A has contributed 
capital, but is not expected to give his services. B and C are 
to contribute their services. B puts in the hours required of 
him, but C devotes much more time and mainly by his efforts 
makes the business a success. B claims a salary. C also claims 
a salary. Is either entitled thereto ? 



CHAPTER XXXIX 

PARTNERSHIPS (CONTINUED). RIGHTS OF 
THIRD PERSONS 

GENERAL STATEMENT 

The partner an agent. In our discussion of the 
nature of partnerships we took occasion to notice that 
each partner is an agent of the others and acts upon 
their behalf as well as for himself whenever he assumes 
to act in furtherance of the firm's business, and there- 
fore has a very large ostensible authority to represent 
the firm. He is not only an agent but he is also a prin- 
cipal, and he may do practically anything that all of the 
members acting together could do in the prosecution of 
the firm's business so long as he keeps within the general 
lines of that business as conducted by the firm. His 
authority may be limited by contract, but unless this 
limitation is known to the third person such third person 
would not be bound thereby, if the circumstances were 
such as to justify a reasonable man in the belief that 
he was a partner with the usual partnership authority. 

Trading and non-trading partnerships. A partner- 
ship is said to be a trading partnership when it buys and 
sells either in the crude or finished form as its main activ- 
ity. Otherwise it is called non-trading. Most partner- 
ships are trading partnerships. The importance of the 

229 



230 BUSINESS LAW 

distinction lies in the fact that in a trading partnership, 
authority to represent the firm implied from the nature 
of the partnership is much greater than in the case of 
a non- trading partnership. This arises from the fact 
that the business of buying and selling requires the 
exercise of many acts which are necessary or reasonable 
means to that end. One who buys and sells must be 
able to extend credit, buy on credit, give, indorse and 
accept commercial paper, make warranties and so on. 
Hence a partner in a trading partnership will be deemed 
to have such powers to bind his other partners unless it 
is known that he has been deprived of them. In a non- 
trading partnership powers that incidentally go with 
buying and selling will not be inferred. But neverthe- 
less in any particular case, the authority of this nature 
may actually exist or apparently exist from the past 
conduct of the firm. It would be a question of fact in 
each case. 

AUTHORITY OF THE PARTNER TO DO SPECIFIC KINDS OF 

THINGS 

Power of partner to buy and sell. A partner in a 
trading partnership has the ostensible authority to buy 
and sell all of those things in which the firm is accustomed 
to deal. It would not be practicable to call together 
all the members of the firm every time a bill of goods 
was to be bought or sold. It is therefore fundamental 
that each partner may act as the agent of the others 
and in his own behalf in purchasing and selling those 
things which fall within the general lines of the partner- 
ship business as carried on. But this right to buy and 
sell would extend merely to stock in trade and not to 



PARTNERSHIPS 23 1 

permanent and important items of the firm property 
used for the purpose of carrying on business of the firm. 

Example 144. A, B and C are partners in 
the business of conducting a dairy having ten 
cows, used for dairy purposes. A here would 
have the ostensible authority to buy food for 
the stock, to contract for pasturage and all 
things necessary from time to time for the 
proper operation of the business. He would also 
have the right to sell milk and butter and any 
other item which might be within the scope of 
the firm business. Suppose, however, he sells to 
D without the consent of the other partners, one 
of the cows. B and C can object to this sale 
and can have it set aside. Similar illustrations 
might be given from any sort of partnership. 
Of course any unauthorized act by one partner 
could be ratified by the others upon learning of it. 

Right of partner to sell and buy upon credit. A 

partner has the ostensible authority to buy and to sell 
upon credit, making such terms on credit as are cus- 
tomary among business men in that line of business. 

Right of partner to bind the firm on negotiable paper. 
As a partner has the righ to buy and sell upon credit, 
he must have the right to do those things which are 
incidental thereto, such as binding the firm upon nego- 
tiable paper. His power to bind the firm upon nego- 
tiable paper would depend upon the purpose for which 
he signed the firm's name. He has no ostensible au- 
thority unless it has been given him in any particular 
case to bind the firm upon paper given him for some 
unusual commission outside of the general conduct of 
the firm's proper business. 

Example 145. A, B and C are partners in 
the grocery business. A buys groceries from D 
on sixty days' credit and makes a promissory 
note in payment, due in sixty days, signing the 



232 BUSINESS LAW 

firm's name to the note. He also goes to E and 
requests the loan of the sum of $1000, represent- 
ing that it is for the benefit of the firm, and gives 
his note to E for $1000. He takes the goods 
which he buys from D and sells them to F for 
cash and puts the money in his own pocket, the 
goods having never come into the partnership 
stock. He also takes the $1000 and puts it in his 
own pocket and absconds. D sues the firm upon 
the note given for the goods. E sues the firm 
upon his note. D can recover even if A was act- 
ing without actual authority and even against 
express directions. But E cannot recover unless 
he can show that B and C actually authorized 
A to borrow this money, for a partner has no 
right to do an unusual act of this sort under 
cover of ostensible authority. If, however, E 
had sold the note to G before maturity and for 
value without notice of the circumstances, G 
would have the right to assume that the note had 
been given for the purchase of goods or for 
some other proper partnership purpose and 
could as an innocent purchaser hold the other 
partners upon the note. 



LIABILITY OF PARTNER FOR TORTS OF CO-PARTNER 

Each partner is liable for the torts of the other partners 

which are committed as a part of some act done in 
furtherance of the firm's business. The reasoning here 
is the 'same as that which governs the law of principal 
and agent. Each partner being an agent of the other 
partners for the purpose of carrying on the firm's business 
may make the other partners liable for any tort com- 
mitted within the scope of his authority. 

LIABILITY OF INCOMING, OUTGOING AND SECRET PART- 
NERS FOR ACTS OF CO-PARTNERS 

Incoming Partners. An incoming partner is not 
liable for any existing debts of the firm unless he assumes 



PARTNERSHIPS 233 

liability as a part of his contract. He will, of course, 
be liable as an existing partner for all of those debts 
which are contracted after his entrance into the firm, 
and this would be true whether he was known by the 
creditor to be a partner or not. The Uniform Partner- 
ship Act creates in this respect an innovation. It 
provides that where a new partner is admitted into the 
firm, then if the business is continued without liquida- 
tion, creditors of the former partners are also creditors 
of the new firm. 

Outgoing Partners. A partner leaving the firm con- 
tinues liable for all of the debts of the firm which were 
created during his connection with it, and he also con- 
tinues liable for the debts created after his leaving the 
firm to all of those who have received no notice of his 
departure and who trade with the firm upon the assump- 
tion that he is still a member. Accordingly, it is essen- 
tial to the cessation of his liability that notice be given 
that he has left the firm. To all those who have dealt 
with the firm during his connection with it, actual notice 
must be given. To those who have not dealt with the 
firm, notice by publication must be given. Actual 
notice is given usually by means of a letter sent to all 
of those who have dealt with the firm, and at the same 
time a notice should be published in some newspaper 
setting forth the fact that he has severed his connection 
with the firm. Any actual notice, no matter how re- 
ceived, would be sufficient to stop future liability. 

Secret Partners. A secret partner is liable to credi- 
tors for all those debts contracted during his actual 
connection with the firm for, inasmuch as he is a real 
party at interest and takes the benefit of the firm's 



234 BUSINESS LAW 

business, he ought to be compelled to assume the burdens 
incidental to membership in a partnership. But if he 
leaves the firm, he is not liable for debts thereafter con- 
tracted, whether or not he has given any notice, for 
future creditors, not knowing of his connection with the 
firm, cannot claim that they traded with the firm upon 
the faith of his connection with it. Consequently, 
the notice mentioned in the last paragraph is not nec- 
essary in the case of a secret partner, but it should be 
given to any particular persons who might have learned 
of his existence in the firm. 

Questions and Problems 

(311) State in general the authority of the partner to repre- 
sent the firm. 

(312) State the distinction between trading and non-trading 
partnerships. What is the importance of the distinction ? Name 
some non-trading partnerships. 

(313) State Example 144. 

(314) State Example 145. 

(315) What is the liability of a partner for the torts of the 
co-partner ? 

(316) Is an incoming partner liable for the past debts of the 
concern? 

(317) Does an outgoing partner remain liable for those debts 
created during his interest? 

(318) If one is really a partner but not known to be such, is 
he liable to creditors for debts created during his interest? Why? 



CHAPTER XL 

PARTNERSHIPS (CONTINUED). REMEDIES OF 
CREDITORS 

PARTNERSHIP CREDITORS 

Right to follow assets of any partner. The creditors 
of the partnership have the right not only to seize by 
process of law the assets of the partnership, but they 
can satisfy any judgment obtained by them by levying 
execution upon the property of any member of the firm, 
although it may be totally unconnected with the part- 
nership business, leaving the partners to work out their 
mutual equities among themselves. 

Example 146. A, B and C form a partner- 
ship. The firm incurs a debt to D, which re- 
mains unpaid. D brings suit against A, B and 
C as partners and secures a judgment against 
A, B and C. C has an automobile which he 
uses for pleasure. D can secure satisfaction 
of his judgment against A, B and C by levying 
upon this automobile. 

This example illustrates the principle which we dis- 
cussed at the beginning of this subject, that a partner- 
ship is not in law a legal unit separate from its members 
as a corporation is, and that each partner has an in- 
dividual liability for the debts of the firm. It would 
not be necessary for D to show in the above case that 
the partnership is insolvent, or that A or B are insol- 

235 



236 BUSINESS LAW 

vent, although that possibly would usually be the fact, 
as the debt would be paid, especially after a judgment 
were obtained, unless insolvency of the firm forbade. 
It is also true that if the firm were insolvent it might 
be put into bankruptcy. But unless C were also in 
bankruptcy the proceedings would not affect D's right 
to proceed against C's individual assets. 

Rights in a court of equity. If the assets of the firm 
and the assets of the individual partners are in a court 
of equity for dissolution purpose, the creditors are then 
put upon a just and equal basis in their rights to share 
in the partnership and individual assets. A number of 
rules have been applied to this situation which we cannot 
here discuss fully. The general rule is that the creditors 
of the partnership must prove up against partnership 
assets, and the individual creditors against individual 
assets until the exhaustion of the particular class of 
assets involved, whereupon they will be entitled to prove 
up equally with the other class of creditors. 

CREDITORS OF PARTNER 

No right against other partners. A creditor of one 
of the partners of the firm has no right, of course, to 
prove his claim against any other partner of the firm, 
or to have any access to that other partner's property. 

Right against partner's interest in the firm. A 
creditor of an individual partner has a right to seek 
satisfaction of his judgment out of any of the assets of 
the debtor wherever he may find them. The partner's 
interest in a partnership is an asset and may accordingly 
be reached by judicial process. The creditor's realiza- 
tion of his claim in that case is not by taking any partic- 



PARTNERSHIPS 237 

ular property out of the partnership property, for the 
partner's property in the firm consists in his right to 
his share of the surplus, if any, after all of the debts are 
paid. Therefore the creditor could simply have A's 
interest in the firm sold for whatever it might be worth. 

Questions and Problems 

(319) State Example 148. 

(320) In a court of equity what rule will prevail as to dis- 
position of assets among creditors of the firm and creditors of 
individual partners ? 

(321) A, of firm of A, B and 'C, owes D $1000 for a purely per- 
sonal matter. Can D hold B or C ? What can D do ? 



CHAPTER XLI 

PARTNERSHIPS (CONTINUED). DISSOLUTION OF 
PARTNERSHIPS 

CAUSES OF DISSOLUTION 

In general. The causes of dissolution may be classed 
under three headings. 

(i) Dissolution by act of parties ; 
Lapse of time ; 
Mutual agreement ; 
Transfer of partner's interest ; 

(2) Dissolution by operation of law ; 

Death of partner ; 
Bankruptcy ; 

(3) Dissolution by judicial proceedings ; 

For misbehavior ; 

For failure of enterprise ; 

For incompetency of partner. 

Dissolution by lapse of time. If the partnership 
agreement sets forth a specific time for the endurance 
of the partnership relation, the lapse of that time will 
not in itself terminate the relationship, as the concern 
may nevertheless go on indefinitely thereafter or by 
definite agreement to renew ; but it would, of course, 
give any partner a right to withdraw and to have the 
concern wound up. 

238 



PARTNERSHIPS 239 

Dissolution by mutual agreement. Whether arrange- 
ment has been for a definite time or not it needs no more 
than to be stated that at any time all parties concerned 
may agree to bring the firm to an end. 

Dissolution by transfer of partner's interest. This 
principle has already been considered. A partner has 
no right to sell out to a stranger or even to an already 
existing partner without the consent of every member of 
the firm. Such transfer by him effects a dissolution of 
the firm ; although the remaining partner or partners may 
choose to go on in a new partnership with the transferee. 

Dissolution by death of partner. The death of a 
partner effects an immediate dissolution of the partner- 
ship. The surviving partner is under an immediate duty 
to wind up the affairs and account to the executor or 
administrator of the deceased partner, and for this pur- 
pose he succeeds legally to all the assets of the firm, and 
has the right, duty and authority to wind up the business 
and to account to the personal representative for the 
share of the deceased partner. 

Bankruptcy of the partnership or any of its members 
results in a dissolution of the firm. If the partnership 
is bankrupt, the business must be wound up and dis- 
tributed among creditors, according to the law of 
bankruptcy. If any member becomes bankrupt, his 
interest in the firm passes to the trustee and therefore 
the firm is dissolved. 

Dissolution by court decree. A court of equity has 
the power to dissolve a firm upon the application of any 
member thereof and against the wishes of the other 
members, for any good cause shown. Among such 
causes are : (1) Financial failure of the firm with no 



240 BUSINESS LAW 

relief in sight; (2) Inability of the partners to work 
compatibly with each other, being constantly at vari- 
ance on vital matters of management; (3) Physical 
or mental incompetency of any member of the firm. 

DISPOSITION OF ASSETS UPON DISSOLUTION 

Where firm solvent. In the case of dissolution of a 
solvent partnership the liquidation should be as follows : 

(1) Payment of debts to non-members of firm ; 

(2) Payment of debts to members of firm ; 

(3) Repayment of capital in the proportions to the 
respective contributions, the members who have con- 
tributed nothing but services, time or skill being not 
entitled to any portion of the capital ; 

(4) Division of the surplus among the members of the 
firm in proportion to their interest in the firm ; it being 
presumed in the absence of agreement that all are inter- 
ested equally no matter what the contribution of capital 
or whether any capital was contributed by them or not. 

Example 147. A, B and C are partners, A 
contributing $10,000, B $5000 and C his time, 
services and skill. The firm dissolves with 
assets of $25,000 and debts of $5000, including 
$2000 loaned by A. The division should be as 
follows : 

(1) To the non-member credit $3000 ; 

(2) To A the repayment of his loan of $2000 ; 

(3) Repayment to A and B, $10,000 and 
$5000 respectively ; 

(4) Division of the remaining $5000 among 
A, B and C in equal parts unless by agreement 
their interest in the firm has been declared to 
be unequal. 

Questions and Problems 

(322) How may a firm be dissolved ? Discuss each item. 

(323) State Example 147. 



CHAPTER XLII 
CORPORATIONS DEFINED 

The corporation a legal person. A corporation is 
often spoken of as an entity, a word denned as " a 
real being whether in contemplation or fact." We 
may, then, think of a corporation as " a real being, in 
contemplation of law." It is a being, an artificial 
person created by law, having a complete existence in 
itself as a unity. A partnership is a relationship among 
individuals. A corporation in the eyes of the law is 
an individual. The individuality of its members is 
distinct from its own. It may own property, buy and 
sell, contract, commit torts and crimes, sue and be sued. 

The laws which apply to " persons " are always re- 
garded as applicable to corporations, unless it is other- 
wise stated or unless in the nature of the case only 
natural persons could have been meant. 

Example 148. A law provides that any 
person who shall employ a child under fourteen 
years of age in a factory shall be guilty of a 
misdemeanor. A corporation employs a child 
under that age. It may be punished under the 
law. (The Overland Cotton Mill Co. v. The 
People, 32 Colo. 263.) 

The corporation's separate existence criticized. It 

is sometimes said that the theory of a corporation as 
having an existence apart from its members is a mere 
fiction and after all it is but an aggregation of individ- 
r 241 



242 BUSINESS LAW 

uals. This criticism is untrue. The very critics who 
make such statements then proceed to discuss its power 
to make contracts, own property, sue and be sued as a 
person, and to set forth that its members are not liable 
individually for its contracts and debts and have no legal 
ownership of its property. It is true that the theory 
of corporate existence will not be allowed by the court 
to cover up fraudulent and criminal conduct by in- 
dividuals, but this is far from saying that the corpora- 
tion so used as a cloak for fraud has no legal existence 
for proper corporate purposes. A corporation is truly, 
for all purposes contemplated by the law creating it, 
a legal person, existing as such by contemplation of law. 

Powers of a corporation in general. A corporation 
being a legal person may be said generally speaking to 
have two broad classes of powers, as follows : 

(i) Powers inherent in its existence as a corporation : 

(a) Power to sue and be sued ; 

(6) Power to own property and acquire and transfer it ; 

(c) Power to contract ; 

(d) Power to commit torts and crimes ; 

(e) Power to make by-laws, have a seal, etc. 

(2) The powers specifically given it in its own par- 
ticular charter. 

A charter essential. A corporation can have no exist- 
ence without a charter, which may be defined as a 
franchise from the state to exist as a corporation. A, 
B and C may agree among themselves to be a corpora- 
tion, but their act is vain unless they have a charter 
from the state creating D, an artificial person. What 
they do without such charter is done by them and they 
are responsible. 



CORPORATIONS DEFINED 243 

Corporations de facto and de jure. Sometimes the 
impression is gained from the distinction drawn between 
corporations de jure and those de facto, that a charter is 
not essential. This impression is fundamentally false. 
A corporation de facto is a corporation with a charter, 
a real corporation, which in some respects has not fully 
complied with the law relating to the formation and 
existence of corporations. A corporation de jure is a 
corporation which has fully complied with such law. 
The purpose of the distinction is merely this, to establish 
that if there has been a bona fide attempt to secure a 
charter, and one has been secured, and action has been 
taken under it, the acts of the supposed corporation 
cannot be said either to be void or to be the personal act 
of its members merely because some act required by 
law may have been overlooked or neglected. The state 
through its attorney general may complain and require 
compliance, but individuals with which it deals can take 
no advantage of it. As to them it is a complete corpora- 
tion if it is de facto. 

The purposes of incorporation. A corporation may 
be created for all or some of a great variety of purposes. 
We may briefly enumerate them, and the student will 
therein see the distinction between a corporation and 
a partnership, and also more fully appreciate the nature 
of a corporation. 

(1) Convenience in having a separate organization 
which can in itself hold title to property, make contracts, 
etc. 

(2) Convenience in making possible the unification 
under one management of many interests. (In a 
corporation there may be thousands of stockholders.) 



244 BUSINESS LAW 

(3) Making existence permanent regardless of the 
changes by death of the members or the transfer inter 
vivos of their shares. 

(4) Facilitating transfer of interests by the transfer 
of the certificate of share. 

(5) Limiting the liability of the member for the debts 
of the corporation to that which has been subscribed 
by him. 

(6) Cutting off the power of any member to represent 
the other members as their agents. A member in a 
corporation is not for that reason an agent either of the 
other shareholders or of the corporation. In a partner- 
ship, all are agents of each other. 

(7) Securing capital from those who contribute be- 
cause they appreciate the limitation of their liability 
and the organization possible in corporate form. 

To these we could add others but they would be but 
adaptations or variations of some of those above. 

Kinds of corporations. Corporations may be classified 
as follows : 

(A) Public corporations, or those which are founded 
by the government for corporate purposes. 

(1) Municipal corporations as cities and towns. 

(2) Quasi-municipal, as counties, boards of educa- 
tion, park boards, etc. 

(B) Private corporations, or those which are owned 
by private individuals, even though of a public nature. 

(1) Stock corporations, or those which are organized 
for the purpose of financial profit. Here we place corpora- 
tions of a strictly private nature as well as railroads and 
all public service corporations having privately owned 
capital stock. 



CORPORATIONS DEFINED 245 

(2) Non-stock corporations, or those not organized 
for private profit. 

(a) Religious corporations. 

(b) Charitable corporations, lodges, institutes of 
learning, pleasure clubs, etc." 

(Quoted from Bays's Cases on Business Law) 

The status of a corporation outside of the state creat- 
ing it. A corporation, being a creature of law, can have 
no rights outside of the limits of the legislative jurisdic- 
tion in which it is created except upon the principles of 
comity. If a charter is granted under the laws of 
Illinois, to a company, the corporation thereby created 
is created by the laws of Illinois which are in force over 
the territorial limits of Illinois, but not elsewhere. 
Whatever rights such corporation has in another state 
are to be determined by the policy and laws of that 
state governing corporations of other states. 

A corporation is described as " domestic " when char- 
tered under the laws of the state in which it is operating ; 
it is called " foreign" as to any other state when seeking 
to operate in that other state. Thus an Illinois cor- 
poration is domestic in Illinois ; but to Indiana it is a 
foreign corporation. 

It is the policy of all the states to permit foreign cor- 
porations to enter and carry on business within the limits 
of the state through the principle of comity ; imposing 
upon such corporations restrictions thought advisable 
according to the public policy of the state. All states 
have foreign corporation laws admitting corporations 
from other states to operate within their territorial 
limits upon compliance with the conditions set forth in 
the statute. These conditions are, generally speaking, 



246 BUSINESS LAW 

the filing of certain papers, as a certified copy of the 
charter, a certificate of the amount of capital to be used 
in the state, and the payment of certain fees. 

The federal constitution delegates to the federal 
government the right to regulate interstate commerce. 
This forbids interference by the states even when (ex- 
cept on matters in which there must be local regulation) 
Congress has not acted. For this reason, the foreign 
corporation laws cannot interfere with carrying on within 
the borders of the state by foreign corporations that 
which is properly interstate commerce. Foreign corpo- 
ration laws also usually merely forbid the " transacting 
of business " within the state. The courts construe 
this not to mean acts of isolated nature, such as borrow- 
ing money, or selling a certain parcel of real estate. 
So it does not mean such acts as bringing suit, defend- 
ing suits, holding meetings, selling stock, etc. A cor- 
poration may do all these things in another state than 
that in which incorporated without compliance with 
foreign corporation laws. Comity permits it. 

The penalty for non-compliance with a foreign corpora- 
tion law is that of a fine, and the denial of the right to 
sue in the courts of the state. 

Questions and Problems 

(324) What is meant by the statement that a corporation is 
an entity? Explain in what sense it is a legal person. 

(325) What is Example 148 ? 

(326) What two classes of powers has a corporation ? Name 
its inherent powers. 

(327) What is a de facto corporation ? What three things are 
essential to its existence? What is the importance in deciding 
that a corporation is at least de facto? 



CORPORATIONS DEFINED 247 

(328) State as many reasons as you can think of for the in- 
corporation of a company. 

(329) What is a municipal corporation? A quasi-municipal 
corporation ? 

(330) What is a private corporation ? Give two classes. 

(331) A corporation is chartered under the laws of New York. 
It brings suit in New Jersey against a New Jersey citizen. The 
citizen claims that it has no existence outside of New York. 
What should the court hold? Why? 

(332) A citizen in New Jersey orders by mail a bill of goods 
from a New York corporation transacting business in New York. 
The New York corporation accepts the order and sends the goods 
by freight to the citizen in New Jersey. Must the New York 
corporation comply with the New Jersey foreign corporation 
laws in order to do this if New Jersey objects ? Why ? 



CHAPTER XLIII 

CORPORATIONS (CONTINUED). 
ORGANIZATION 

THE CORPORATE STRUCTURE 

The charter. The charter is the very basis of cor- 
porate existence, the foundation upon which the struc- 
ture is reared. Formerly charters consisted of special 
laws enacted by the legislature creating specifically 
the corporation desired by its sponsors. Such laws set 
forth the objects of the corporation and constituted the 
measure of its powers. For instance, Northwestern 
University (not a corporation for profit) has a charter con- 
sisting in a special law enacted by the Illinois legislature. 

Special legislation is now entirely forbidden in most 
states in cases in which a general law is applicable. It 
is now the policy of the law to enact general corpora- 
tion laws, with which the incorporators must comply ; 
they are entitled to their charter as a matter of course 
and of right. The procedure to obtain a charter under 
such laws is to file a certificate setting forth the things 
required by the law, as, for instance, the name of the 
proposed corporation, its capital stock, the number of 
shares, the par value of each share, the objects of the 
corporation, the location of its principal office, and other 
items, varying according to the laws of the different 
states. 

248 



ORGANIZATION OF CORPORATIONS 249 

This certificate is upon file in the office of the Secre- 
tary of State, and must generally also be filed in the 
Recorder's office in the county in which the principal 
office of the corporation is situated. 

The by-laws. The corporation must have rules by 
which rights of members, duties of officers, times of 
meeting, and other matters incident to the proper 
government of a corporation may be set forth. By-laws 
are somewhat similar to the ordinances of a city. They 
should set forth matters of more or less permanence. 
They differ from resolutions passed at stockholders' 
and directors' meetings in that they are in the nature of 
rules or set forth some action decided upon by the 
members or directors. The power to enact by-laws is 
in the stockholders unless the statute confers it upon 
the directors. It would seem to be more properly in 
the stockholders as the constituent body of the cor- 
poration. But under some statutes the power has been 
given to the directors. 

The stockholders. Those who contribute or agree 
to contribute capital to the enterprise or who succeed 
to the interests of such are called stockholders. They 
are also called members of the corporation. They are 
its real owners, although in theory of law they do not 
own it, but merely have a contract relationship with it. 
A stockholder may become such by original subscrip- 
tion to stock which has never been issued, or may pur- 
chase stock which has been issued to another. The sub- 
ject of stock and its transfer is hereafter discussed. 

The stockholders have the right to elect the direc- 
tors, hold meetings, direct fundamental policies, and 
apply to the court for protection where the corporation 



250 BUSINESS LAW 

is in danger from mismanagement. They have a right 
to dividends out of its profits, but these dividends must 
first be declared by the directors. 

A stockholder has no voice in corporate management 
except by vote at stockholders' meeting. He has no 
right to represent the corporation except as authority 
may have been conferred upon him as it might be 
conferred upon any other agent. He may contract 
and deal with the corporation, and sue it and be sued 
by it as any other individual may. (Shares and their 
transfer are commented upon later.) 

The directors. The directors compose a body (called 
the directorate or board of directors) which has the 
power to govern the corporation. They are to a cor- 
poration as a city council is to a city, or a legislature to 
a state. They are elected by the stockholders, and are 
usually, and under some laws must be, stockholders. 
In small corporations all the stockholders may be 
directors. 

The directors have the power when sitting as a body 
to determine the policies of the corporation. Their 
powers are very great, and except in the matter of funda- 
mental changes, they may practically do anything which 
the corporation itself may do. 

The directors can only act as a board, that is, in 
meeting assembled. The by-laws usually provide for a 
regular annual meeting, regular monthly meetings and 
special meetings called as provided by the by-laws. 

The directors of a corporation must exercise sound 
discretion and the highest degree of good faith. Their 
office is in the nature of a trust. Any director may 
deal with his corporation and the contract will be 



ORGANIZATION OF CORPORATIONS 25 1 

binding, provided the contract is voted for by the other 
directors constituting a majority. In other cases the 
contract is voidable by the corporation. In any case 
the director must disclose everything known to him 
material to the contract. The directors elect the 
executive officers of the corporation. This is one of 
their most important duties and it is not infrequent to 
have little else done at an annual meeting than the elec- 
tion of officers and reports of retiring officers. 

As the director's office is a personal one he cannot 
delegate the duties thereof. 

The number of directors depends upon the provisions 
of the by-laws. There should be an odd number, not 
less than three and as many more as may be considered 
wise. 

The executive officers. The executive officers are 
elected by the directors. The usual executive officers 
are those named below. 

The president. The president of a corporation is 
its highest officer in point of dignity, although there 
may be others who have more actual power than he 
has. His duty is to preside at meetings of the board of 
directors and keep a general supervision of corporation 
affairs. He may be, and very frequently is, the direct- 
ing figure in the corporation. He is elected by the 
directors, usually at their annual meeting. 

The secretary. The duty of the secretary of any 
corporation depends very largely upon the nature of 
its business, its extent and organization. He has all 
of those duties generally described as secretarial, such as 
keeping the records of the corporation and the meetings 
of its directors, sending out reports, giving notices, etc. 



252 BUSINESS LAW 

The treasurer. The treasurer of a corporation 
handles its funds, and keeps the financial record. He 
has no authority by virtue of his office except that which 
arises out of his fiscal duties. 

Other officers. There may be other officers in any 
corporation, but the three named above are commonly 
the most important. There may be a chairman of 
the board, vice presidents, cashier, counsel and other 
elective officers. 

The employed staff. To complete the organization 
of the corporation is to be mentioned its employed staff, 
large or small as the case may be. Salesmen, clerks, 
bookkeepers, accountants, whatever they may be, are 
employed by the executive officers or those to whom 
they have given authority to employ help. 

Questions and Problems 

(333) In what form were early charters ? 

(334) How is incorporation now accomplished? 

(335) What are by-laws? Who enacts them? 

(336) What is stock? What is the owner of stock called? 

(337) State the rights of stockholders. 

(338) Who is a director? What are his powers? State his 
rights and duties. 

(339) Who are the executive officers of a corporation ? Define 
the nature of the office of each. 



CHAPTER XLIV 

CORPORATIONS (CONTINUED) . 
THE POWERS OF A CORPORATION 

THE POWERS INHERENT IN CORPORATE EXISTENCE 

In general. We have already referred to and enu- 
merated the most important of these, but a more ex- 
tended statement remains to be made of some of them. 

Power to commit torts. It is now firmly established 
that a corporation may be guilty of a tort and sued for 
the resulting damages, just as an individual may. In 
fact perhaps the largest class of cases in the courts to-day 
is that made up of suits against corporations for damages 
arising out of the tort of negligence — personal injury 
and other tort cases. But a corporation may also be 
guilty of willful torts, of libel, of deceit, for example. 
Whenever any agent or servant of a corporation in the 
scope of his authority or employment commits a tort, 
the corporation must respond in damages to the person 
injured thereby. 

Power to commit crimes. It was long denied that a 
corporation had the power to commit a crime, and it is 
probably true that of some crimes it cannot be guilty 
— that is to say, of the crimes which are defined as of a 
personal character, as murder. But corporations have 
been convicted in our courts of many crimes — criminal 
negligence, conspiracy, rebating, employment of minors 

253 



254 BUSINESS LAW 

contrary to law and violations of all sorts of health and 
safety ordinances. 

Power to contract, sue and be sued, own and deal 
in property. A corporation, out of its very existence 
as such, may contract, own and deal in property, sue and 
be sued and do every other act or thing reasonably 
necessary to effectuate the purposes of its existence. 
Its power to contract, own and deal in property is, 
however, limited by the express provisions of its charter. 

We may now discuss the powers of a corporation as 
given or effected by charter provisions. There are 
said to be two sorts of charter powers, those express and 
those implied. 

EXPRESS CHARTER POWERS 

In general. A corporation is a creature of limited 
powers. Aside from those general powers which every 
corporation has unless denied, we must find the par- 
ticular power of any corporation in its particular charter. 
Its charter is the source and measure of its powers. Any 
power which it does not possess is technically described 
as " ultra vires " (" beyond the power of "), and an act 
attempted by it which is not within its power is spoken 
of as an ultra vires act. 

Statement of powers. The particular purpose for 
which a corporation is created should be stated, and the 
statement should also be general enough not to hamper 
the corporation in its activities. 

IMPLIED POWERS 

General rule. A corporation will be held to have 
all those powers which are to be implied from its express 



POWERS OF CORPORATIONS 255 

powers as necessary or reasonably desirable to carry 
the express powers into execution. The statement 
of a corporation's powers is necessarily a very brief 
statement. It would be manifestly impossible to set 
forth in detail all powers that it shall possess. Having 
its main objects in view, whatever is done by it to reason- 
ably accomplish those objects is within its charter 
powers. 

Implied power to do all that is reasonable to carry 
express powers into execution. A corporation may do 
everything (unless specifically denied by law) to ac- 
complish the purpose of its express powers. An act 
done by it which as an end in itself might be ultra vires 
becomes proper if it is done as a means of accomplishing 
its proper purposes. 

Example 149. The B Lumber Company 
desires to sell lumber to M, a building contrac- 
tor, for use in the erection of a certain building. 
M is required to furnish the usual contractor's 
bond signed by an acceptable surety. The B 
Lumber Company, in order to get the business, 
agrees to become surety on the bond. After- 
wards M defaults and the owner of the building 
sues M and the B Lumber Company upon the 
bond. The B Lumber Company defends that 
it had no power to become surety on the bond 
as it was chartered to carry on a lumber and 
not a surety business. This defense would not 
be good as it became surety on the bond for 
proper corporate purposes ; if it had merely in 
order to earn a fee been surety upon a bond 
(as, say, an appeal bond) the act would be ultra 
•vires. 

Implied power to own real property. A corporation 
without being specifically authorized in its charter 
may own all real estate which is necessary for the pur- 



256 BUSINESS LAW 

pose of providing it with a home and otherwise for 
carrying on its business. It may also acquire property 
to hold for its reasonable future development and may 
also take property in satisfaction of debt. Unless 
chartered to deal in real estate, it ought not to hold 
large quantities of real estate merely to make a revenue 
therefrom or profit thereupon. Its surplus funds should 
be used for dividends, not for investments not authorized 
by its charter. It is usually held, however, that the 
state, only, can question its real estate holdings and can 
require it to dispose of the excess. 

Implied power to borrow money, loan money, sub- 
scribe to or own stock of other corporations, etc. A 
corporation may borrow money for its proper corporate 
purposes and give mortgages upon its real or personal 
property in security for the same. 

If it is not organized as a bank, a corporation cannot 
loan money, as a rule, for its surplus funds should be 
used for the purpose of paying dividends. Yet where 
it is saving money for proper corporate expenditures it 
could loan out the same on proper security for a short 
term. 

The power of a corporation to subscribe to stock or 
hold stock in another corporation where its charter 
does not include that purpose is denied. In fact, in 
some states, the power cannot be expressly given, as 
many evils have grown out of the ownership or control 
of stock of one corporation by another. 

EFFECT OF ULTRA VIRES ACT 

In general. We have been discussing the power of 
the corporation, and found that the extent of its power 



POWERS OF CORPORATIONS 257 

depends upon the provisions of its charter. Acts 
attempted to be done beyond that power are techni- 
cally spoken of as ultra vires. If the corporation at- 
tempts such acts, what results follow? Of this we will 
now inquire. 

Right of stockholders to prevent act ultra vires. The 
stockholders of a corporation can by appeal to the courts 
prevent an act ultra vires unless they are estopped by 
their consent thereto. 

Right of either party to an executory contract ultra 
vires to repudiate it. While the rule on this point as 
held in all states under all conditions cannot be stated 
in our brief space, it may be generally said that so long 
as the act which is ultra vires is entirely executory and 
no benefit has been received under it by the party seek- 
ing to withdraw, there may be such withdrawal without 
liability, upon the ground that it is a withdrawal from or 
repudiation of an act which the corporation cannot 
bind itself to do. 

Same where benefit received. It is the general rule, 
though not so held in all states, that a corporation can- 
not after it has received the benefit of a contract, plead 
ultra vires when sued by the other party for its failure 
to perform. 

Questions and Problems 

(340) May a corporation be guilty of tort ? Give an example. 

(341) Can a corporation be guilty of a crime ? 

(342) What is the meaning of the words ultra vires ? Ex- 
plain how any given act may be ultra vires in one corporation 
and not in another. 

(343) What implied powers has a corporation? 

(344) Explain Example 149. 

(345) What is the power of a corporation to own real property? 



258 BUSINESS LAW 

(346) Can a corporation loan money ? 

(347) Can a corporation subscribe for stock in another cor- 
poration ? 

(348) A corporation is sued by A upon a contract which he 
claims he has made with the corporation. The corporation pleads 
ultra vires. State how the court will consider this defense. 



CHAPTER XLV 
CORPORATE SHARES 

SHARE DEFINED 

In general. The capital stock of a corporation is 
divided into units called shares, which are issued to 
subscribers to the stock or to their assignees according to 
their respective interests. These shares have a " par " 
or face value determined by the proportion which the 
unit bears to the entire capital stock. Thus, if the 
capital stock (as determined by the provisions of the 
charter) is $100,000 and the number of shares (also 
as determined by the charter) is 1000, the par value of a 
share is $100. The capital stock may be divided 
into as many shares as thought desirable when obtain- 
ing the charter, except that the law may require cer- 
tain par values, as ten dollars, or a multiple thereof. 
In practice it is usual to have shares of the par value 
of five dollars, ten dollars, fifty dollars or one hundred 
dollars. 

It is not necessary, unless a statute so provides (and 
it does so provide in some states) that all shares be sub- 
scribed for or issued. A corporation may be organized 
with a capital stock only part of which has been sub- 
scribed for, the rest held in reserve for future subscribers. 
Such stock is known as " unissued stock " and is fre- 
quently referred to as " treasury stock," but " treasury 

259 



260 BUSINESS LAW 

stock " is a phrase more correctly used to describe stock 
that has once been issued and then reacquired by the 
corporation and for the time being held in its treasury. 

The market value of stock is not the same as its par 
value except by accident. This is the value for which 
the stock is selling on the market, and that is deter- 
mined by the public's appraisal of its worth as deter- 
mined by a variety of items — the tangible assets of 
the corporation, its earnings, its prospects, its undivided 
surplus, etc. 

The certificate of stock. It is the practice to issue 
to a stockholder a certificate bearing the seal of the 
corporation and the signature of the officers empowered 
by the by-laws to issue such certificates, setting forth 
the fact that a certain named person is the owner of a 
certain number of shares of a certain par value. The 
issuance of this certificate is not essential to stock owner- 
ship, but it is a highly convenient thing for the stock- 
holder to have and he is entitled to the evidence of his 
ownership, and may compel the corporation to issue 
it to him. In practice it is issued as a matter of course 
to the stockholder at the time he becomes such. 

On the back of this certificate there is a blank pro- 
vided for use in its transfer. 

This certificate is detached from a book of certificates, 
and a stub from which it is taken provides a record 
showing the certificate which was surrendered, the new 
owner and the certificate number. 

LIABILITY UPON SHARES 

Liability of subscriber. A subscriber to stock is 
liable to an amount represented by the par value of 



CORPORATE SHARES 261 

the shares subscribed for by him. Thus if a person sub- 
scribes for ten shares of stock of the par value of fifty 
dollars per share, his liability is five hundred dollars. 
When this has been paid he cannot be called upon to 
pay any further, no matter how great may become the 
indebtedness of the corporation. We have already noted 
that this limitation of liability is one main reason for the 
incorporation of a company. 

Liability of transferee. If A subscribes for stock and 
afterwards transfers it to B, what is B's liability? This 
would depend upon the answer to the question whether 
the stock had been paid and if not paid, whether B 
knew or should have known of that fact. Stock once 
paid is paid for all time and as to all holders. But one 
who knowingly buys unpaid stock becomes liable to 
pay it. 

Payment for stock. Stock may be paid for in money, 
property or services. When money is the medium of 
payment, there can of course be no question as to the 
amount paid, but stock is often paid for in property and 
sometimes in services. The question then is, has the 
property been correctly valued? In many states it 
is provided that the directors may value the property 
and such valuation if made in good faith shall be con- 
clusive. But even in such a case a manifest overvalu- 
ation of property of ascertainable or substantially as- 
certainable value would be deemed fraudulent without 
other evidence to show it. Where a corporation is 
formed to exploit a patent having no market value and 
no known real value, the matter of valuation becomes a 
problem because it is desired to issue the patent to the 
corporation in full payment for a certain amount of 



262 BUSINESS LAW 

stock. In some states, property of that sort could not 
constitute payment for stock unless it turned out upon 
exploitation to have real value; but in other states 
stock could be paid with such property if the directors 
acted in good faith. 

Stock having no par value. Very recently in a few 
states laws have been passed providing for incorporation 
of stock companies without par value. It is claimed 
for such laws that the evil of overvaluation and of 
" watered stock " is done away with. 

" Watered stock " is a term including any stock which 
does not represent true value or stock liability as where 
donated for services fictitiously overvalued, or for prop- 
erty overvalued, or where given away. It has been the 
cause of much evil in corporation practice. 

TRANSFER OF STOCK 

Stock is transferred by a transfer upon the books of 
the company accompanied by a transfer of the cer- 
tificate. In practice, the stock certificate is delivered 
to the transferee with a power of attorney for the trans- 
fer on the books of the company, indorsed upon the 
back of the certificate. The transferee then presents 
the certificate to the company, which takes it up and 
cancels it and issues a new one in the name of the 
transferee. 

Questions and Problems 

(349) What is a share of stock? 

(350) What is meant by par value? What are the usual 
par values ? 

(351) Must all the capital stock of a corporation be sub- 
scribed for? 



CORPORATE SHARES 263 

(352) Distinguish between unissued stock and treasury stock. 

(353) What is the purpose of a certificate of stock? 

(354) What is the liability of a subscriber to stock? of his 
transferee ? 

(355) May stock be paid for in property other than money? 
Suppose such property is overvalued, have creditors any rights ? 

(356) Define " watered stock." 



PART VII 
LAW OF PROPERTY 

CHAPTER XLVI 
GENERAL DESCRIPTION 

Property defined. The political theory upon which 
all governments are now founded permits the acquisi- 
tion of a thing or a right by an individual as his own to 
the exclusion of all others. That which is so exclusively 
controlled or " owned " we describe as his property. 
The law of property is the law by which it is determined 
what may be the subject of such ownership, the extent 
of the use to which the owner may put it, the manner 
by which he may acquire and part with it and the dis- 
position thereof upon his death. 

Real and personal property. Property is said to be 
"real property," or "realty" or "real estate" when it 
consists in land and that which is annexed thereto in 
permanent fashion for its improvement ; and to be 
" personal property," or " personalty " or " personal 
estate " when it consists in other forms. 

Example 150. A owns a tract of land con- 
sisting of 1 60 acres upon which he builds a 
residence and a barn and other houses. He 
fences the tract and plants trees and crops. 
He discovers that he has deposits of copper in the 
earth and erects a mining shaft. He furnishes 
264 



LAW OF PROPERTY 265 

his house with usual furniture and household 
appliances, and he places on the house screens, 
which he removes in the winter time. He builds 
shelves in the pantry. He has horses and 
farming implements. Which of these are real 
and which personal property? The land is of 
course real estate ; so is the residence and barn 
and other houses ; so is the fence and the trees 
and crops. The copper in the earth is also real 
estate and so is the mining shaft. The furni- 
ture and household appliances are not for per- 
manent improvement of the place and are per- 
sonal property. The screens are a part of the 
house even though removable, and are real 
estate. The shelves in the pantry are for the 
permanent improvement of the house as a house 
and are real estate. The horses and farming 
implements are personal property. 

Note in this example how one may change 
real into personal property and personal prop- 
erty into real. When the shelves in the 
pantry were in the form of standing trees they 
were real estate. A cuts down the trees and mills 
them into boards. The boards are now no 
longer a part of the land even though upon it, 
and are personal property. He puts them up 
as pantry shelves. They are now a part of the 
house. So with the mineral in the earth : when 
mined it becomes personal property. 

The reader may naturally enough ask why this dis- 
tinction is made if one form passes by act of the owner 
so readily into another form. Is it a mere academic dis- 
tinction ? No. Some very practical results hinge upon 
the distinction, as we may note by another example. 

Example 151. A, in the example above, sells 
his tract of land to B, describing it by metes 
and bounds and making no specific reference to 
anything upon the land. All that which we 
have described as real property passes to B, in- 
cluding the pantry shelves and the screens, even 
though those screens are stored in the basement 
for the winter at the time of the sale. If there 



266 BUSINESS LAW 

were a furnace in the house it would also pass 
as a part of the land, but a stove would not pass, 
as it is not generally considered as a permanent 
improvement of the house as such. The horses 
and implements and all that we have described 
as personal property would not pass to B. 

We may perhaps safely describe the distinction in the 
following manner: all which is reasonably regarded as 
a part of the land or for its permanent improvement 
becomes real estate, but articles of a movable nature 
merely used upon it or to furnish it are personal property. 

Besides the practical difference we have noticed in 
the sale of a farm, we notice others. 

A sale of real property requires formalities not essen- 
tial to a sale of personalty, and rightly so. Real prop- 
erty cannot be sold except by written instrument. 
Personal property passes readily from hand to hand as 
one observes every day. We noticed that a contract 
of sale of personal property for a certain amount or 
upwards requires a written memorandum, but that is 
only where possession does not pass, or price is not paid, 
and is a mere precaution against perjury. But title 
to real property requires a deed for its transfer. 

A distinction is also made in disposition of real and 
personal property upon one's death. Real property 
goes to one's heirs, and personal property to one's ad- 
ministrator or executor for administration of the estate, 
as will be noted more fully hereafter. 

That which is called real property by reason of its 
annexation to real estate, where it would except for that 
be called personal property, is called a " fixture." 

When we are considering the right of the owner to 
remove a fixture as against some other person claiming 



LAW OF PROPERTY 267 

it, we must consider whether that other person is pur- 
chaser of the land, mortgagee of the land, or tenant of 
the land. 

If the question arises between owner and purchaser, 
or between owner and mortgagee, everything that we 
have said above is the solution ; but if a tenant puts in 
fixtures for household or trade or ornamental purposes 
he may remove them as against the landlord or those 
claiming under the landlord unless their removal would 
on account of the manner of their annexation cause 
material injury to the real estate to which they are 
attached. Thus a tenant may remove awnings, counters, 
shelving, and the like ; anything attached by him, even 
though if attached by the owner it would be considered 
a part of the place, unless so firmly attached by the 
tenant that its removal would injure the place. 

Of course an owner may tear down anything upon his 
place no matter how firmly annexed, if no one else has 
any interest in the place. What we have said is based 
upon the assumption of the intervention of another 
who claims something as against the owner. 

Division of property into tangible and intangible 
property. That which a person owns under the law of 
property may be tangible or such as may be seen and 
felt and that which is intangible or rests in contempla- 
tion. 

Example 152. A owns a parcel of real 
estate with a house upon it, and furniture in 
the house. He also has a promissory note made 
by B. He has a right to sue C for breach of 
contract. A's house and furniture is tangible 
property. The note represents an intangible 
right against B. The right of action against C 
is intangible. 



268 BUSINESS LAW 

Questions and Problems 

(357) What is meant by the word " property " ? 

(358) What two general kinds of property are there ? 

(359) In Example 150 state what property is "real," what 
" personal." 

(360) Show how real property may be converted into per- 
sonal property and personal property into real property. 

(361) A sells his land, describing it in the deed as Lot 2 in Block 
6 in John Smith's Subdivision in the Southwest Quarter of the 
Southwest Quarter of Sec. 8, Township 39 North, Range 14 
East of the Third Principal Meridian in Cook County, Illinois. 
There is a house on the land with removable storm doors which 
are stored in the barn. There are also pictures on the walls; 
gas chandeliers suspended from the ceilings and usual house- 
hold furniture. Also growing crops on the land, and a stack of 
hay. After the contract for the deed is signed, A starts to remove 
all of the articles mentioned. The purchaser objects. Who is 
entitled to the various articles mentioned? Why? 

(362) A, owning a lot with a store building and house upon 
it, leases the property to B. B opens a dry goods store and moves 
his household goods into the house. In the store he puts a counter, 
fastening it to the floor with screws. He also puts shelving upon 
the walls. He puts a partition across the back of the store. In 
the house he also puts up shelving, installs a gas stove, a heating 
stove, with stove pipes into the chimney, and storm doors. Can 
he remove these things at the end of his term ? Why ? 

(363) What is tangible property? intangible property? 
Give examples. 



CHAPTER XLVII 
ESTATES IN LAND 

Estates defined. By estate which one has in land 
we mean the duration of his interest therein, whether 
absolute or limited, and if limited, to what extent. 

Estates enumerated. Estates may be classified as 
follows : 

A. Freehold estates. 

I. Estates in fee simple. 
(i) In general 

(2) Estates in remainder 

(3) Estates in reversion 

(4) Estates by executory devise 
II. Life estates. 

(1) Conventional life estates 

(2) Legal life estates 

(a) Dower 

(b) Curtesy 

B. Estates less than freehold. 

I. Estates for years. 
II. Estates from year to year. 
III. Estates at will and sufferance. 

Question 
(364) Make a table of estates in land. 



269 



CHAPTER XLVIII 
THE FREEHOLD ESTATES 

THE ESTATE IN FEE SIMPLE 

In general. An estate in fee simple exists where one 
owns real estate absolutely without limitation in time. 
That is to say, it belongs to him without any succes- 
sion except such as he shall name or such as the law 
upon his death shall make if in his lifetime he does not 
himself dispose of it by deed or at his death by will. 
If in the instrument by which he gains title some one 
is to succeed him after a period of time or at his death, 
he does not have a fee simple. If he should try to sell 
it, the prospective purchaser would object that he did 
not own it absolutely, did not have a fee simple, but a 
life estate with reversion or remainder to some one else. 
In other words, ownership in fee simple is that owner- 
ship which one has when no restrictions are upon one's 
power of disposition and to which if no disposition is 
made, one's heirs, as named by law, succeed. 

The term "fee " is a word coming to us as a relic of 
the feudal system, when " feuds " or fees were estates in 
land granted by a superior to his retainers in return 
for service or rent, which at first were held at the will 
of the lord or for life, but came to be inheritable. 

A fee simple in the early law was created by a con- 
veyance to a person and his heirs, without mentioning 

270 



THE FREEHOLD ESTATES 27 1 

what heirs " but leaving that to his own pleasure or the 
disposition of the law." If A conveyed to B, B got a 
life estate with reversion to A or A's heirs. But if A 
conveyed to " B and his heirs," B got a fee simple. 
The heirs got nothing except as they might inherit 
from B if B had not in his lifetime disposed of it. The 
rule was that the word " heirs " described B's estate 
and was not used for the purpose of giving the heirs 
anything in their own right. This rule was called the 
" rule in Shelley's case," that being one of the early 
cases in which it was first announced. 

Fee simples are now created by will or deed to a 
person or to a person and his heirs. The necessity 
of the use of the word " heirs " has been abolished. 

There was an important estate in fee known to the 
early law as the " estate in fee tail." It was an estate 
conveyed to one and a particular class of his heirs. 
This estate has been abolished by modern law. 

Estate in remainder. The owner of a fee simple 
estate, in conveying it or devising it by will, may grant 
or give a limited estate to one person and the remainder 
to another. The first estate is known as the particular 
estate and the rest of the fee is known as the remainder. 

Example 153. A by will leaves his farm to 
his eldest son for life, and after that son's death 
then to his youngest son in fee. Here the eldest 
son has the particular estate and the youngest 
son the remainder. 

A remainder is said to be vested when the remainder- 
man is already entitled to it although his enjoyment 
thereof is postponed. In fact the particular estate may 
prevent his ever enjoying it, for it may outlast his life. 



272 BUSINESS LAW 

Thus in the above example the eldest son may outlive 
the youngest and yet the remainder is vested. The 
youngest son owns the farm subject to his brothers' 
life estate and may sell it subject to that estate. Be- 
cause he clearly owns the remainder of the fee we say 
it has vested in him. 

A remainder is said to be contingent when the vesting 
thereof is uncertain being based upon a condition that 
may never happen. 

Example 164. A by will gives land to B for 
life and then to B's eldest son in fee. If B has no 
son then to C and his heirs. In this case the re- 
mainder is uncertain until B has a son. There- 
upon it vests and becomes a vested remainder. 
The law favors the vesting of estates as soon as 
possible. 

Reversions. Where an estate which is less than the 
fee is granted out to a person, the remainder of the fee 
being undisposed of, that part of the fee after the expira- 
tion of the estate is known as the reversion. It is that 
which comes back to the grantor or his heirs. 

Example 155. A, owning Lot X in fee, leases 
it to B for a term of ninety-nine years. In this 
case A and his heirs are the owners of the rever- 
sion. A reversion differs from a remainder in 
this, that in the remainder, another than the 
grantor or his heirs is to take the fee, while a 
reversion comes back to the grantor or his heirs. 
And by that we mean it comes back to them un- 
less the grantor has by deed or will disposed of 
his reversion to another. 

Executory devises. It was a rule of the common law 
that an estate could not be created to take effect in the 
future unless supported by a particular estate. An 
exception was made to this in the case of an executory 



th£ freehold estates 273 

devise, or a gift of real estate by will to take effect 
in the future upon the happening of a contingency. 

Uses and trusts. The early common law permitted 
one to own land for another's benefit, or as it was said 
"to the use" of another. Thus A could own land to 
B's use. Here A had the legal title, but subject to 
B's rights as defined by the instrument of conveyance, 
which a court of equity would protect. Manifest abuses 
arose out of this device. It was employed to enable 
the church to be the real owner of land forbidden for 
it to own by the statute of mortmain. A could own 
the land to the use of the church. This gave A the 
legal ownership, but the church the beneficial use of the 
land. Other abuses arose, until it was declared by the 
Statute of Uses, that whenever land was held to an- 
other's use the legal title should at once by operation 
of law vest in the party having the use. The courts 
of equity in construing this statute decided that it did 
not apply to active uses, that is to say, to cases in which 
the holder of the legal title had active duties to per- 
form, and such uses came to be known as trusts, which 
is the term we employ to-day to describe a very fre- 
quent condition of the title. 

We may think of a trust as a device by which the 
title is longitudinally split up into two parts : one, 
the legal title in one person and the other the equitable 
title in another. Thus A by will gives land to B in 
trust for C, declaring in detail the objects of the trust. 
The purposes of creating trusts are manifold. A donor 
is thereby enabled to hold an estate together by the 
appointment of a trustee to hold the title in trust for 
the benefit of a number of persons; property is given 



274 BUSINESS LAW 

in trust where the beneficiary is not of sufficient ability 
to manage by reason of minority, spendthrift habits, 
or inexperience ; a better control can be kept over the 
disposition of property where limited interests are 
desired to be given ; and many other conveniences accom- 
plished. 

LIFE ESTATES 

Conventional life estates. A conventional life estate 
is an estate for the tenant's own life or the life of another 
person, and which is created by will or deed rather than 
by operation of law. Thus, an estate for A's life, or 
an estate to A for B's life is a conventional life estate. 
By definition, it ceases at the death of the party named 
and the interest of the reversioner or remainderman 
will come to him for his enjoyment. 

Legal life estates — dower and curtesy. The two 
most important estates created by law are those of 
dower and curtesy. 

Dower is the life estate given by law to a surviving 
wife in real estate owned by her husband during the 
marriage and which by law at his death goes in fee to 
other heirs (subject to the wife's dower). 

Example 156. A, husband of B, buys real 
estate. This acquisition by operation of law at 
once gives B an inchoate dower interest, that is, 
a possibility of having dower therein based upon 
her outliving A. If this occurs, the law gives B 
a life estate in one third of this real estate for 
her life. 

The possibility of a wife outliving her husband places 
a cloud upon his title, but this may be removed by her 
joining in the deed and acknowledging it according to 
law. 



THE FREEHOLD ESTATES 275 

Dower is only a life interest, and at that in only one 
third of the deceased husband's real estate. Upon the 
wife's death, the heirs of the husband or any one to 
whom he may have sold it or willed it have it abso- 
lutely. Or by allowing the widow a sum of money her 
dower claim may be thus satisfied and the real estate 
thus cleared of her estate. If the wife inherits any of 
her husband's real estate she takes that absolutely, 
with dower in that which she does not inherit. 

Example 157. A dies leaving no children or 
descendants. Under the law of his state his 
widow gets all his personal property, and one 
half his real estate, the other half going to his 
brothers and sisters. A has two vacant lots. 
One of these goes to A's widow as hers abso- 
lutely and the other goes to A's brothers and 
sisters subject to the widow's dower or one third 
interest for her life. 

Curtesy was the estate of a surviving husband for his 
life in the wife's lands. In dower by early law it was 
not necessary that there be the birth of a child. But 
this was essential to curtesy. Curtesy was a life estate 
in all of the wife's lands. 

Now by statute in many states curtesy has been 
abolished and a surviving husband given an estate 
similar to that of dower. 

Questions and Problems 

(365) Define an estate in fee simple. Where does the word 
" fee " come from ? 

(366) Is the word " heirs " necessary to the creation of a fee 
simple ? 

(367) A conveys to B for life and after B's death to C. After 
B and C both die A's heirs claim the estate as against C's heirs. 
Who is entitled to it ? 



276 BUSINESS LAW 

(368) Define an estate in remainder. What two sorts are 
there ? Give examples. 

(369) Define an estate in reversion. Give an example. 

(370) Define an executory devise. 

(371) Define a trust, state its object and give an example. 

(372) Define a conventional life estate. 

(373) State Examples 156 and 157. 

(374) Define curtesy. 



CHAPTER XLIX 
THE ESTATES LESS THAN FREEHOLD 

The estates less than freehold defined. An estate 
less than freehold is one less than for life, that is, not 
measured by a life. It may be a tenancy for ninety- 
nine years, yet it is still less than freehold. 

The law of landlord and tenant here involved. In 
considering estates for less than freehold we are con- 
sidering the law of landlord and tenant, as we popularly 
understand those terms. Freehold estates have many 
incidents we have not time to notice, in which they 
differ materially from estates less than freehold which 
we are now to consider. A life estate is not usually 
granted by lease as these tenancies are, but by will or 
deed, and there is usually no rent to pay for the enjoy- 
ment and a right to have a wider enjoyment than a 
tenant under a lease. 

Kinds of estates less than freehold. The tenancies 
less than freehold are estates for a specific period, called 
estates for years ; periodic tenancies, called estates from 
year to year ; and estates at will and at sufferance. 

Estates from year to year or periodic tenancies. An 
estate may run by periods, that is, from month to month, 
from quarter to quarter, or from year to year. This 
kind of estate is called a periodic estate or estate 
from year to year. The significance of this estate is 

277 



278 BUSINESS LAW 

that the estate may be terminated as of the end of the 
first or any subsequent period by either landlord or 
tenant by the giving of the required notice prior to the 
expiration of the period ; and if that notice is not given 
then the tenancy runs for another like period or until 
such notice is given. A year to year tenancy by the 
common law requires a six months' notice for its termi- 
nation, but this has been shortened by statute as, say, 
sixty days. A month to month tenancy usually requires 
a thirty-day notice. A tenancy terminating at a fixed 
period, as for one year, requires no notice to terminate it. 
Periodic tenancies are created by contract or, as is 
more usually the case, by a lease for a certain period, 
as one year, and then a remaining in possession after 
the expiration of the lease, without the execution of 
any new one. 

Example 158. A rents a farm to B for one 
year under a written lease. When the year 
expires B continues to occupy. A may treat 
him as a trespasser and eject him or treat him 
as a tenant for another year upon the same terms 
as those of the previous year. B's intention in 
remaining in possession is immaterial. A must 
elect to regard him as a trespasser or as a tenant, 
and is bound by his election when made. He 
cannot change it. No notice was necessary to 
terminate the lease at the end of the first year, 
but after that it becomes a periodic tenancy and 
will continue to run from year to year until the 
proper notice is given by the one side or the 
other to terminate it. 

Estates for years. An estate for years is an estate 
for any fixed period, as for five years, or for one year 
or for six months. It may resolve itself into a periodic 
tenancy, as we have shown, by a holding over. It 
needs no notice by landlord or tenant to terminate it. 



THE ESTATES LESS THAN FREEHOLD 279 

The lease. Where in tenancies for years (that is, 
for any fixed period, as for one year) there is a written 
instrument setting forth the rights and duties of land- 
lord and tenant, this instrument is called a lease, and 
it is always advisable to have a lease in any tenancy of 
importance. As we have already shown, where a tenant 
holds over after the expiration of the term prescribed 
in a written lease he may be treated as tenant for a like 
term under the same conditions. 

Rent. The compensation paid by a tenant for the 
use of the premises is known as rent. It is a matter of 
contract between the parties as to amount and time 
payable. 

Duties of landlord and tenant. The tenant must 
be sure that the premises suit his purposes before he 
rents them, as there is no implied warranty that they 
are fit for any particular purpose. He must return 
them to the landlord in the same condition, subject 
to reasonable wear and damage by the elements. The 
landlord, on his part, must be careful to disclose hidden 
defects of which he has knowledge, and where he re- 
tains a portion of the premises, as halls, and the like, 
which are used by the tenants, he must be careful to 
keep them in good condition. 

Eviction by landlord. If the landlord ousts the tenant 
this is known as eviction. If the eviction is wrongful, 
the tenant can recover the possession or sue for damages. 
He is not liable for rent after eviction. Eviction is known 
as either actual or constructive. Actual eviction con- 
sists in an actual physical ouster of the tenant from all 
or a part of the premises. Constructive eviction con- 
sists of some conduct on the part of the landlord that 



280 BUSINESS LAW 

destroys the beneficial enjoyment by the tenant and 
justifies him leaving the premises, which in fact for such 
reason he actually does leave. In that case his obliga- 
tion to pay rent ceases. 

Questions and Problems 

(376) What are the estates less than freehold ? 

(376) What is a periodic tenancy ? What is its significance ? 

(377) What notice is required to terminate such a tenancy? 

(378) What happens when a tenant holds over his term ? 

(379) Define an estate for years. 

(380) What is a lease? State its purpose. Is it essential 
to tenancy? 

(381) What are the duties of a tenant ? 

(382) A rents an apartment, the landlord retaining control 
of the heating apparatus and agreeing to furnish heat. No heat 
is furnished. Can A remain in possession and refuse to pay 
rent? Can he abandon the premises? 

(383) What is actual eviction? 



CHAPTER L 

MORTGAGES 

Definition of mortgage. A real estate mortgage is 
a conveyance of real estate in security for a debt. 

Example 159. A desires to borrow $5000 
from B, but B requires security. To this end 
A conveys to B a certain parcel of real estate 
by a form of deed which recites the debt and 
provides for defeasance to A upon his payment 
of the debt. 

History of law of mortgages. In early common law, 
where great attention was given to form, a mortgage 
was treated as a conveyance of the estate to the mort- 
gagee upon a condition subsequent that if the mort- 
gagor would perform the condition (i.e. in most cases 
pay a debt) his estate would revest, otherwise go to 
the mortgagee absolutely. This view was in accord- 
ance with the terms of the mortgage but was harsh in 
operation. 

The equity of redemption. The courts of equity in 
course of time came to take a more equitable view of the 
situation. If a mortgagor filed a bill reciting the facts 
of his indebtedness and of the conveyance in security 
therefor, setting forth that the day of the payment of 
the debt (the " law day ") had passed and therefore by 
the strict rules of the common law he had lost his estate, 
and praying to be allowed by the court to pay the debt, 

281 



282 BUSINESS LAW 

with accruing interests and costs, and thereby redeem 
his property, the court allowed him to do so, setting a 
time limit in which it must be done. His right to file 
such a bill came to be known as his " equity of redemp- 
tion," and it is from this phrase that we get the word 
" equity " to-day. When we hear a person speaking of 
his equity in real estate, he means thereby that he owns 
the real estate subject to a mortgage ; although, as we 
shall see, a mortgagor by the modern view owns the 
legal title rather than an equity. 

The bill of foreclosure. As soon as the courts of 
equity gave this right to the mortgagor, they created a 
cloud upon the title of the mortgagee. For in case he 
desired to sell the property, claiming ownership therein 
by reason of the fact that the law day had passed with 
the condition unperformed the purchaser would fear that 
the mortgagor might file his bill for redemption. To 
meet this situation the mortgagee filed his bill reciting 
the fact of the mortgagor's default and his right to re- 
deem, and asking that he be compelled to redeem within 
a time to be fixed by the court, otherwise to be " for- 
ever barred and foreclosed." This remedy the court 
would grant and the mortgagee's estate would thereupon 
become absolute unless redemption were made in accord- 
ance with the court's decree. 

Modern view of a mortgage. It is seen that even 
under the equitable view of the right to redeem, the 
penalty was still harsh if the mortgagor could not pay 
the debt. The harshness has been eliminated by the 
courts under the modern view. A mortgage is now 
looked upon as in the nature of a lien in security for a 
debt. If the debt is not paid, then the property must 



MORTGAGES 283 

be sold and out of the proceeds the debt paid, and the 
balance, if any, turned over to the mortgagor as belong- 
ing to him. Under this view the mortgagor is the legal 
owner, who may convey the estate (subject to the mort- 
gage) and whose heirs upon his death take title. He is 
entitled to possession and to the rents and profits. And 
if he makes default, the process of foreclosure is by sale 
either through the courts (as required in some states) 
or under a power of sale contained in the mortgage. 

Statutory period of redemption. After a mortgage 
is foreclosed, there is a period of some months (varying 
in different states) in which the mortgagor may redeem 
from the sale by paying the debt and all costs and in- 
terest to date. 

Mortgages in the form of trust deeds. A mortgage 
is frequently put in the form of a trust deed. Instead of 
being a deed from mortgagor to mortgagee it is a deed 
from the mortgagor to a trustee who is to hold the legal 
title in trust for the purposes of the security. 

The evidence of the debt. The debt is expressed in 
a note or series of notes, referring to the mortgage or 
trust deed, which on its part describes the debt by de- 
scribing the notes. 

Questions and Problems 

(384) Define a mortgage. Give an example. 

(385) What was the ancient legal view of a mortgage? 

(386) What is meant by the " equity of redemption"? Why 
is it so called ? 

(387) What is a bill of foreclosure ? 

(388) State the modern view of a mortgage. 

(389) What is meant by the statutory period of redemption 
from sale under foreclosure ? 

(390) What is a trust deed in the nature of a mortgage ? 



CHAPTER LI 
TRANSFER OF TITLE BY DEED 

Deed of conveyance defined. Real estate is con- 
veyed inter vivos by deed. The deed is the written 
instrument by which the transfer is set forth. It con- 
tains the names of the grantor and grantee, a descrip- 
tion of the property, the conditions and covenants, 
and the consideration. 

Kinds of deeds. The forms of deeds most in use to- 
day are the warranty deed, the quitclaim deed and 
the release deed. 

The warranty deed is a deed whereby the grantor 
warrants his title. By statute in some states the use of 
certain words as " grant and convey " or " convey and 
warrant " will signify in themselves warranty of title. 
The warranty deed is the deed most used where land is 
conveyed in regular sale. 

A quitclaim deed is a deed wherein the grantor quits 
his claim upon the land therein described. He makes 
no warranties as to his title, but the quitclaim deed is 
just as effectual to pass title as the warranty deed. But 
in the latter case, the grantor can be sued for defects 
that appear in the title. 

A release deed is a deed used for the purpose of re- 
conveying any interest which one has by reason of a 
former conveyance to him of some special title. Thus 

284 



TRANSFER OF TITLE BY DEED 285 

if A mortgages his property in form of a trust deed to 
B, B upon payment of the debt will release to A all 
interest he has acquired by reason of such trust deed. 

Attestation and acknowledgment. In some states a 
deed must be witnessed; in others, not. In all states 
a deed must be acknowledged for certain purposes, as 
waiver of homestead and dower, constituting construc- 
tive notice when recorded, etc. Forms of acknowledg- 
ment differ in various states. See the form of acknowl- 
edgment to the warranty deed above set out. 

Questions and Problems 

(391) What is the commonly accepted meaning of the word 
" deed"? State the kinds in common use. 

(392) What is meant by the acknowledgment of a deed? 
What is its purpose? 



CHAPTER LII 
RULES OF DESCENT — WILLS 

RULES OF DESCENT 

General statement. When the owner of property- 
dies, what shall be done with his property? Our im- 
mediate thought is that it should go to his relatives. 
But in what proportions ? What relatives ? Some dece- 
dents leave wives and children ; some only brothers and 
sisters ; some only parents. The law of descent and 
distribution is the law whereby the disposition of one's 
property at his death is determined. 

If the owner of property is not satisfied with the rules 
of descent as established by law, the law permits him 
to direct in what manner it shall descend and be dis- 
tributed by a declaration left by him at his death setting 
forth how he desires it to be done. This declaration 
is called his will. By this will he is enabled to govern 
the disposition of his property and even to give it to a 
stranger. Some restrictions are placed upon his right. 
A widow cannot entirely be deprived ; and other re- 
strictions may be imposed by local law. 

We will notice the subject of Descent and Distribu- 
tion and also the law of Wills in this chapter. 

If one dies without a will he is spoken of as an " intes- 
tate.'' If he leaves a will, he is called a " testator." 

The rules of descent. The early law established 

286 



RULES OF DESCENT — WILLS 287 

certain rules of descent, or, as they were called, " canons 
of descent," some of the principles of which we still 
maintain, but which in their entirety have been greatly 
modified. One rule was that of primogeniture, or the 
right of the eldest son to inherit for the purpose of 
keeping the inheritance undivided. One of the most 
notable things done by the founders of our government 
was to abolish this rule. Another rule was that " the 
male issue shall be admitted before the female." Now, 
no distinction is made. 

Another rule was that, " The lineal descendants ad 
infinitum of any person deceased shall represent their 
ancestor." This principle in the law of descent is still 
true. 

It means that if a man dies leaving a son, and two 
grandchildren of a deceased son, in case no will directs 
otherwise, the two grandchildren will get the father's 
share. 

The rules of descent as they now obtain differ in dif- 
ferent states, and what is said here must be taken with 
that qualification in mind. Generally speaking we may 
say that property descends or is distributed as follows : 

First assumption : Decedent leaves widow and children: 
All of his real estate goes to his children (a dower interest 
therein to the widow) and a fraction (as one third) of 
his personal property to his widow and the balance to 
his children. 

Second assumption : Decedent leaves children and no 
widow : All of his estate goes to his children. 

Third assumption : Decedent leaves no widow and 
children: His estate goes to his parents and his brothers 
and sisters. 



288 BUSINESS LAW 

Fourth assumption : Decedent leaves widow and no 
children: Personal estate goes to widow, but a portion 
of real estate goes to brothers and sisters. 

WILLS 

Will defined. A will may be defined as an instru- 
ment executed according to the requirements of the law 
by which a person directs the disposition of his property 
at his death. It is also called a testament. An addi- 
tion to a will is called a codicil. 

Will of no effect until death. A will has no effect 
until death. Hence it may be revoked or changed at 
any time before death. For this reason we frequently 
speak of a decedent's will as his last will, for any former 
wills made by him would be supplanted by the last will. 
In changing a will care must be taken to make the 
changes under the same formalities as those required 
in making a will; otherwise the changes will be 
nugatory and may impair the original will. 

Formalities to be observed in making wills. Because 
a will is such an important document and comes 
into force and is proved after the death of its author, 
the law requires it to be executed with certain 
formalities. 

Signature. A will must be signed by the testator. 
If he cannot sign his name he may make a mark as his 
signature. 

Attestation. A will must be witnessed by more than 
one witness, generally two or three, as provided by local 
law. The witnessing must be in his presence, that is, 
where he can see the witness sign the document as 
witness thereto. 



RULES OF DESCENT — WILLS 289 

Revocation of wills. A will, being of no effect until 
death, may be revoked at any time. Revocation may 
be by tearing, burning, canceling, obliterating, with 
intent to revoke, or by a new will. It is also revoked 
by subsequent marriage ; and in part revoked by subse- 
quent birth of a child, unless this contingency is foreseen 
and provided for in the will. 

PROBATE AND ADMINISTRATION 

Court of probate jurisdiction. Certain courts, known 
as probate courts, county courts or surrogate courts, 
are given jurisdiction over the probate of wills and ad- 
ministration of estates, testate and intestate. 

The personal representative. When one dies leaving 
an estate, it is essential that some person should be 
selected as his representative for the purpose of settling 
his affairs, that is, to collect the assets, pay the debts 
and distribute what remains to those entitled thereto 
under the law or according to the will. 

If there is a will, a person may be named therein to 
perform this service. Such a person is called an execur 
tor. If there is no will, or if the will does not name a 
person, the court of probate will appoint one, and he 
is then known as an administrator. His duties are to 
collect the assets, pay debts, make an inventory, dis- 
tribute assets to those entitled thereto and render a 
final report and account. 

The personal representative takes a legal title to the 
personal property of the decedent in trust to use it for 
the settlement of the estate, but the real estate goes direct 
to the heirs according to the law of descent or to the 
devisees according to the provisions of the will. He has 



290 BUSINESS LAW 

nothing to do with the real property, unless the personal 
property is insufficient to pay debts, in which case he 
may subject the real property to the payment of such 
debts. 

Questions and Problems 

(393) What is meant by " descent " of property? Can an 
owner of property change the rules of descent as to his own prop- 
erty ? How ? 

(394) Name some " canons of descent " that have been abol- 
ished. 

(395) Name another canon of descent that is still true. 

(396) State the four examples of descent given in the text. 

(397) Define a will. When does it take effect ? 

(398) State the formalities in making a will. 

(399) How may a will be revoked? 

(400) Who is an executor? an administrator? 



CONSTITUTION 

OF THE 

UNITED STATES OF AMERICA* 



We the People of the United States, in Order to form a more perfect 
Union, establish Justice, insure domestic Tranquility, provide for the 
common defence, promote the general Welfare, and secure the Bless- 
ings of Liberty to ourselves and our Posterity, do ordain and estab- 
lish this Constitution for the United States of America. 



ARTICLE. I. 

Section, i. All legislative Powers herein granted shall be vested 
in a Congress of the United States, which shall consist of a Senate and 
House of Representatives. 

Section. 2. The House of Representatives shall be composed of 
Members chosen every second Year by the People of the several States, 
and the Electors in each State shall have the Qualifications requisite 
for Electors of the most numerous Branch of the State Legislature. 

No Person shall be a Representative who shall not have attained to 
the Age of twenty five Years, and been seven Years a Citizen of the 
United States, and who shall not, when elected, be an Inhabitant of 
that State in which he shall be chosen. 

Representatives and direct Taxes shall be apportioned among the 
several States which may be included within this Union, according to 
their respective numbers, which shall be determined by adding to the 
whole Number of free Persons, including those bound to Service for a 
Term of Years, and excluding Indians not taxed, three fifths of all 
other Persons. The actual Enumeration shall be made within three 
Years after the first Meeting of the Congress of the United States, and 
within every subsequent Term of ten Years, in such Manner as they 
shall by Law direct. The number of Representatives shall not exceed 
one for every thirty Thousand, but each State shall have at Least one 

* Reprinted from the text issued by the State Department. 
291 



292 CONSTITUTION OF THE UNITED STATES 

Representative; and until such enumeration shall be made, the State 
of New Hampshire shall be entitled to chuse three, Massachusetts 
eight, Rhode Island and Providence Plantations one, Connecticut five, 
New-York six, New Jersey four, Pennsylvania eight, Delaware one, 
Maryland six, Virginia ten, North Carolina five, South Carolina five, 
and Georgia three. 

When vacancies happen in the Representation from any State, the 
Executive Authority thereof shall issue Writs of Election to fill such 
Vacancies. 

The House of Representatives shall chuse their Speaker and other 
Officers; and shall have the sole Power of Impeachment. 

Section. 3. The Senate of the United States shall be composed of 
two Senators from each State, chosen by the Legislature thereof, for 
six Years; and each Senator shall have one Vote. 

Immediately after they shall be assembled in Consequence of the 
first Election, they shall be divided as equally as may be into three 
Classes. The Seats of the Senators of the first Class shall be vacated 
at the Expiration of the second Year, of the second Class at the Expira- 
tion of the fourth Year, and of the third Class at the Expiration of the 
sixth Year, so that one third may be chosen every second Year; and if 
Vacancies happen by Resignation, or otherwise, during the Recess of 
the Legislature of any State, the Executive thereof may make tempo- 
rary Appointments until the next Meeting of the Legislature, which 
shall then fill such Vacancies. 

No Person shall be a Senator who shall not have attained to the 
Age of thirty Years, and been nine Years a Citizen of the United States, 
and who shall not, when elected, be an Inhabitant of that State for 
which he shall be chosen. 

The Vice President of the United States shall be President of the 
Senate, but shall have no Vote, unless they be equally divided. 

The Senate shall chuse their other Officers, and also a President pro 
tempore, in the Absence of the Vice President, or when he shall exer- 
cise the Office of President of the United States. 

The Senate shall have the sole Power to try all Impeachments. 
When sitting for that Purpose, they shall be on Oath or Affirmation. 
When the President of the United States is tried, the Chief Justice shall 
preside: And no Person shall be convicted without the Concurrence 
of two thirds of the Members present. 

Judgment in Cases of Impeachment shall not extend further than to 
removal from Office, and disqualification to hold and enjoy any Office 
of honor, Trust or Profit under the United States : but the Party con- 
victed shall nevertheless be liable and subject to Indictment, Trial, 
Judgment and Punishment, according to Law. 

Section. 4. The Times, Places and Manner of holding Elections 



CONSTITUTION OF THE UNITED STATES 293 

for Senators and Representatives, shall be prescribed in each State by 
the Legislature thereof; but the Congress may at any time by Law 
make or alter such Regulations, except as to the Places of chusing 
Senators. 

The Congress shall assemble at least once in every Year, and such 
Meeting shall be on the first Monday in December, unless they shall 
by Law appoint a different Day. 

Section. 5. Each House shall be the Judge of the Elections, Re- 
turns and Qualifications of its own Members, and a Majority of each 
shall constitute a Quorum to do Business; but a smaller Number may 
adjourn from day to day, and may be authorized to compel the Attend- 
ance of absent Members, in such Manner, and under such Penalties as 
each House may provide. 

Each House may determine the Rules of its Proceedings, punish its 
Members for disorderly Behaviour, and, with the Concurrence of two 
thirds, expel a member. 

Each House shall keep a Journal of its Proceedings, and from time 
to time publish the same, excepting such Parts as may in their Judgment 
require Secrecy; and the Yeas and Nays of the Members of either 
House on any question shall, at the Desire of one fifth of those Present, 
be entered on the Journal. 

Neither House, during the Session of Congress, shall, without the 
Consent of the other, adjourn for more than three days, nor to any 
other Place than that in which the two Houses shall be sitting. 

Section. 6. The Senators and Representatives shall receive a Com- 
pensation for their Services, to be ascertained by Law, and paid out of 
the Treasury of the United States. They shall in all Cases, except 
Treason, Felony and Breach of the Peace, be privileged from Arrest 
during their Attendance at the Session of their respective Houses, and 
in going to and returning from the same; and for any Speech or 
Debate in either House, they shall not be questioned in any other 
Place. 

No Senator or Representative shall, during the Time for which he 
was elected, be appointed to any civil Office under the Authority of the 
United States, which shall have been created, or the Emoluments 
whereof shall have been encreased during such time; and no Person 
holding any Office under the United States, shall be a Member of 
either House during his Continuance in Office. 

Section. 7. All Bills for raising Revenue shall originate in the 
House of Representatives; but the Senate may propose or concur with 
Amendments as on other Bills. 

Every Bill which shall have passed the House of Representatives 
and the Senate, shall, before it become a Law, be presented to the 
President of the United States; If he approve he shall sign it, but if 



294 CONSTITUTION OF THE UNITED STATES 

not he shall return it, with his Objections, to that House in which it 
shall have originated, who shall enter the Objections at large on their 
Journal, and proceed to reconsider it. If after such Reconsideration 
two thirds of that House shall agree to pass the Bill, it shall be sent, 
together with the Objections, to the other House, by which it shall like- 
wise be reconsidered, and if approved by two thirds of that House, it 
shall become a Law. But in all such Cases the Votes of both Houses 
shall be determined by yeas and Nays, and the Names of the Persons 
voting for and against the Bill shall be entered on the Journal of each 
House respectively. If any Bill shall not be returned by the President 
within ten Days (Sundays excepted) after it shall have been presented 
to him, the same shall be a Law, in like Manner as if he had signed it, 
unless the Congress by their Adjournment prevent its Return, in which 
Case it shall not be a Law. 

Every Order, Resolution, or Vote to which the Concurrence of the 
Senate and House of Representatives may be necessary (except on a 
question of Adjournment) shall be presented to the President of the 
United States; and before the Same shall take Effect, shall be approved 
by him, or being disapproved by him, shall be repassed by two thirds 
of the Senate and House of Representatives, according to the Rules 
and Limitations prescribed in the Case of a Bill. 

Section. 8. The Congress shall have Power To lay and collect 
Taxes, Duties, Imposts and Excises, to pay the Debts and provide 
for the common Defence and general Welfare of the United States; 
but all Duties, Imposts and Excises shall be uniform throughout the 
United States; 

To borrow Money on the credit of the United States; 

To regulate Commerce with foreign Nations, and among the several 
States, and with the Indian Tribes; 

To establish an uniform Rule of Naturalization, and uniform Laws 
on the subject of Bankruptcies throughout the United States; 

To coin Money, regulate the Value thereof, and of foreign Coin, and 
fix the Standard of Weights and Measures; 

To provide for the Punishment of counterfeiting the Securities and 
current Coin of the United States; 

To establish Post Offices and post Roads; 

To promote the Progress of Science and useful Arts, by securing for 
limited Times to Authors and Inventors the exclusive Right to their 
respective Writings and Discoveries; 

To constitute Tribunals inferior to the supreme Court; 

To define and punish Piracies and Felonies committed on the high 
Seas, and Offences against the Law of Nations; 

To declare War, grant Letters of Marque and Reprisal, and make 
Rules concerning Captures on Land and Water; 



CONSTITUTION OF THE UNITED STATES 295 

To raise and support Armies, but no Appropriation of Money to that 
Use shall be for a longer Term than two Years; 

To provide and maintain a Navy; 

To make Rules for the Government and Regulation of the land and 
naval Forces; 

To provide for calling forth the Militia to execute the Laws of the 
Union, suppress Insurrections and repel Invasions; 

To provide for organizing, arming, and disciplining, the Militia, and 
for governing such Part of them as may be employed in the Service of 
the United States, reserving to the States respectively, the Appointment 
of the Officers, and the Authority of training the Militia according to 
the discipline prescribed by Congress; 

To exercise exclusive Legislation in all Cases whatsoever, over such 
District (not exceeding ten Miles square) as may, by Cession of partic- 
ular States, and the Acceptance of Congress, become the Seat of the 
Government of the United States, and to exercise like Authority over 
all Places purchased by the Consent of the Legislature of the State in 
which the same shall be, for the Erection of Forts, Magazines, Arse- 
nals, dock- Yards, and other needful Buildings; — And 

To make all Laws which shall be necessary and proper for carrying 
into Execution the foregoing Powers, and all other Powers vested by 
this Constitution in the Government of the United States, or in any 
Department or Officer thereof. 

Section. 9. The Migration or Importation of such Persons as any 
of the States now existing shall think proper to admit, shall not be pro- 
hibited by the Congress prior to the Year one thousand eight hundred 
and eight, but a Tax or duty may be imposed on such Importation, not 
exceeding ten dollars for each Person. 

The Privilege of the Writ of Habeas Corpus shall not be suspended, 
unless when in Cases of Rebellion or Invasion the public Safety may 
require it. 

No Bill of Attainder or ex post facto Law shall be passed. 

No Capitation, or other direct, Tax shall be laid, unless in Proportion 
to the Census or Enumeration herein before directed to be taken. 

No Tax or Duty shall be laid on Articles exported from any State. 

No Preference shall be given by any Regulation of Commerce or 
Revenue to the Ports of one State over those of another: nor shall 
Vessels bound to, or from, one State, be obliged to enter, clear, or pay 
Duties in another. 

No Money shall be drawn from the Treasury, but in Consequence 
of Appropriations made by Law; and a regular Statement and Account 
of the Receipts and Expenditures of all public Money shall be pub- 
lished from time to time. 

No Title of Nobility shall be granted by the United States : And no 



296 CONSTITUTION OF THE UNITED STATES 

Person holding any Office of Profit or Trust under them, shall, without 
the Consent of the Congress, accept of any present, Emolument, Office, 
or Title, of any kind whatever, from any King, Prince, or foreign State. 

Section. 10. No State shall enter into any Treaty, Alliance, or 
Confederation; grant Letters of Marque and Reprisal; coin Money; 
emit Bills of Credit; make any Thing but gold and silver Coin a 
Tender in Payment of Debts ; pass any Bill of Attainder, ex post facto 
Law, or Law impairing the Obligation of Contracts, or grant any Title 
of Nobility. 

No State shall, without the Consent of the Congress, lay any Im- 
posts or Duties on Imports or Exports, except what may be absolutely 
necessary for executing its inspection Laws : and the net Produce of all 
Duties and Imposts, laid by any State on Imports or Exports, shall be 
for the Use of the Treasury of the United States; and all such Laws 
shall be subject to the Revision and Controul of the Congress. 

No State shall, without the Consent of Congress, lay any Duty of 
Tonnage, keep Troops, or Ships of War in time of Peace, enter into 
any Agreement or Compact with another State, or with a foreign 
Power, or engage in War, unless actually invaded, or in such imminent 
Danger as will not admit of delay. 

ARTICLE. II. 

Section, i. The executive Power shall be vested in a President of 
the United States of America. He shall hold his Office during the 
Term of four Years, and, together with the Vice President, chosen for 
the same Term, be elected, as follows 

Each State shall appoint, in such Manner as the Legislature thereof 
may direct, a Number of Electors, equal to the whole Number of Sena- 
tors and Representatives to which the State may be entitled in the 
Congress: but no Senator or Representative, or Person holding an 
Office of Trust or Profit under the United States, shall be appointed 
an Elector. 

The Electors shall meet in their respective States, and vote by Ballot 
for two Persons, of whom one at least shall not be an Inhabitant of the 
same State with themselves. And they shall make a List of all the Per- 
sons voted for, and of the Number of Votes for each ; which List they 
shall sign and certify, and transmit sealed to the Seat of the Govern- 
ment of the United States, directed to the President of the Senate. 
The President of the Senate shall, in the Presence of the Senate and 
House of Representatives, open all the Certificates, and the Votes 
shall then be counted. The Person having the greatest Number of 
Votes shall be the President, if such Number be a Majority of the 
whole Number of Electors appointed; and if there be more than one 



CONSTITUTION OF THE UNITED STATES 297 

who have such Majority, and have an equal Number or Votes, then the 
House of Representatives shall immediately chuse by Ballot one of 
them for President; and if no Person have a Majority, then from the 
five highest on the List the said House shall in like Manner chuse the 
President. But in chusing the President, the Votes shall be taken by 
States, the Representation from each State having one Vote; A quorum 
for this Purpose shall consist of a Member or Members from two thirds 
of the States, and a Majority of all the States shall be necessary to a 
Choice. In every Case, after the Choice of the President, the Person 
having the greatest Number of Votes of the Electors shall be the Vice 
President. But if there should remain two or more who have equal 
Votes, the Senate shall chuse from them by Ballot the Vice President. 

The Congress may determine the Time of chusing the Electors, and 
the Day on which they shall give their Votes; which Day shall be the 
same throughout the United States. 

No Person except a natural born Citizen, or a Citizen of the United 
States, at the time of the Adoption of this Constitution, shall be eligible 
to the Office of President; neither shall any Person be eligible to that 
Office who shall not have attained to the Age of thirty five Years, and 
been fourteen Years a Resident within the United States. 

In Case of the Removal of the President from Office, or of his Death, 
Resignation, or Inability to discharge the Powers and Duties of the said 
Office, the Same shall devolve on the Vice President, and the Congress 
may by Law provide for the Case of Removal, Death, Resignation or 
Inability, both of the President and Vice President, declaring what 
Officer shall then act as President, and such Officer shall act accordingly, 
until the Disability be removed, or a President shall be elected. 

The President shall, at stated Times, receive for his Services, a Com- 
pensation, which shall neither be encreased nor diminished during the 
Period for which he shall have been elected, and he shall not receive 
within that Period any other Emolument from the United States, or 
any of them. 

Before he enter on the Execution of his Office, he shall take the fol- 
lowing Oath or Affirmation : — 

" I do solemnly swear (or affirm) that I will faithfully execute the 
Office of President of the United States, and will to the best of my 
Ability, preserve, protect and defend the Constitution of the United 
States." 

Section. 2. The President shall be Commander in Chief of the 
Army and Navy of the United States, and of the Militia of the several 
States, when called into the actual Service of the United States; he may 
require the Opinion, in writing, of the principal Officer in each of the 
executive Departments, upon any Subject relating to the Duties of their 
respective Offices, and he shall have Power to grant Reprieves and 



295 CONSTITUTION OF THE UNITED STATES , 

Pardons for Offences against the United States, except in Cases of 
Impeachment. 

He shall have Power, by and with the Advice and Consent of the 
Senate, to make Treaties, provided two thirds of the Senators present 
concur; and he shall nominate, and by and with the Advice and Consent 
of the Senate, shall appoint Ambassadors, other public Ministers and 
Consuls, Judges of the supreme Court, and all other Officers of the 
United States, whose Appointments are not herein otherwise provided 
for, and which shall be established by Law : but the Congress may by 
Law vest the Appointment of such inferior Officers, as they think proper, 
in the President alone, in the Courts of Law, or in the Heads of 
Departments. 

The President shall have Power to fill up all Vacancies that may 
happen during the Recess of the Senate, by granting Commissions 
which shall expire at the End of their next Session. 

Section. 3. He shall from time to time give to the Congress Infor- 
mation of the State of the Union, and recommend to their Consideration 
such Measures as he shall judge necessary and expedient; he may, on 
extraordinary Occasions, convene both Houses, or either of them, and 
in Case of Disagreement between them, with Respect to the Time of 
Adjournment, he may adjourn them to such Time as he shall think 
proper; he shall receive Ambassadors and other public Ministers; he 
shall take Care that the Laws be faithfully executed, and shall Commis- 
sion all the Officers of the United States. 

Section. 4. The President, Vice President and all civil Officers of 
the United States, shall be removed from Office on Impeachment for, 
and Conviction of, Treason, Bribery, or other high Crimes and Mis- 
demeanors. 

ARTICLE III. 

Section, i. The judicial Power of the United States, shall be 
vested in one supreme Court, and in such inferior Courts as the Con- 
gress may from time to time ordain and establish. The Judges, both 
of the supreme and inferior Courts, shall hold their Offices during good 
Behaviour, and shall, at stated Times, receive for their Services, a Com- 
pensation, which shall not be diminished during their continuance in 
Office. 

Section. 2. The judicial Power shall extend to all Cases, in Law 
and Equity, arising under this Constitution, the Laws of the United 
States, and Treaties made, or which shall be made, under their Author- 
ity; — to all Cases affecting Ambassadors, other public Ministers and 
Consuls; — to all Cases of admiralty and maritime Jurisdiction; — to 
Controversies to which the United States shall be a Party; — to Contro- 
versies between two or more States; — between a State and Citizens 



CONSTITUTION OF THE UNITED STATES 299 

of another State; — between Citizens of different States, — between 
Citizens of the same State claiming Lands under Grants of different 
States, and between a State, or the Citizens thereof, and foreign States, 
Citizens or Subjects. 

In all Cases affecting Ambassadors, other public Ministers and Con- 
suls, and those in which a State shall be Party, the supreme Court shall 
have original Jurisdiction. In all the other Cases before mentioned, 
the supreme Court shall have appellate Jurisdiction, both as to Law 
and Fact, with such Exceptions, and under such regulations as the 
Congress shall make. 

The Trial of all Crimes, except in Cases of Impeachment, shall be 
by Jury; and such Trial shall be held in the State where the said Crimes 
shall have been committed; but when not committed within any State, 
the Trial shall be at such Place or Places as the Congress may by Law 
have directed. 

Section. 3. Treason against the United States, shall consist only 
in levying War against them, or in adhering to their Enemies, giving 
them Aid and Comfort. No Person shall be convicted of Treason unless 
on the Testimony of two Witnesses to the same overt Act, or on Con- 
fession in open Court. 

The Congress shall have Power to declare the Punishment of Trea- 
son, but no Attainder of Treason shall work Corruption of Blood, or 
Forfeiture except during the Life of the Person attainted. 

ARTICLE. IV. 

Section, i. Full Faith and Credit shall be given in each State to 
the public Acts, Records, and judicial Proceedings of every other State. 
And the Congress may by general Laws prescribe the Manner in which 
such Acts, Records and Proceedings shall be proved, and the Effect 
thereof. 

Section. 2. The Citizens of each State shall be entitled to all 
Privileges and Immunities of Citizens in the several States. 

A Person charged in any State with Treason, Felony, or other 
Crime, who shall flee from Justice, and be found in another State, shall 
on Demand of the executive Authority of the State from which he fled, 
be delivered up, to be removed to the State having Jurisdiction of the 
Crime. 

No Person held to Service or Labour in one State, under the Laws 
thereof, escaping into another, shall, in Consequence of any Law or 
Regulation therein, be discharged from such Service or Labour, but 
shall be delivered up on Claim of the Party to whom such Service or 
Labour may be due. 

Section. 3. New States may be admitted by the Congress into this 



3<oo CONSTITUTION OF THE UNITED STATES 

Union; but no new State shall be formed or erected within the Juris* 
diction of any other State ; nor any State be formed by the Junction 
of two or more States, or Parts of States, without the Consent of the 
Legislatures of the States concerned as well as of the Congress. 

The Congress shall have Power to dispose of and make all needful 
Rules and Regulations respecting the Territory or other Property 
belonging to the United States; and nothing in this Constitution shall 
be so construed as to Prejudice any Claims of the United States, or of 
any particular State. 

Section. 4. The United States shall guarantee to every State in 
this Union a Republican Form of Government, and shall protect each 
of them against Invasion ; and on Application of the Legislature, or of 
the Executive (when the Legislature cannot be convened) against 
domestic Violence. 

ARTICLE. V. 

The Congress, whenever two thirds of both Houses shall deem it 
necessary, shall propose Amendments to this Constitution, or, on the 
Application of the Legislatures of two thirds of the several States, shall 
call a Convention for proposing Amendments, which, in either Case, 
shall be valid to all Intents and Purposes, as Part of this Constitution, 
when ratified by the Legislatures of three fourths of the several States, 
or by Conventions in three fourths thereof, as the one or the other 
Mode of Ratification may be proposed by the Congress; Provided that 
no Amendment which may be made prior to the Year One thousand 
eight hundred and eight shall in any Manner affect the first and fourth 
Clauses in the Ninth Section of the first Article; and that no State, 
without its Consent, shall be deprived of its equal Suffrage in the 
Senate. 

ARTICLE. VI. 

All Debts contracted and Engagements entered into, before the 
Adoption of this Constitution, shall be as valid against the United 
States under this Constitution, as under the Confederation. 

This Constitution, and the Laws of the United States which shall be 
made in Pursuance thereof; and all Treaties made, or which shall 
be made, under the Authority of the United States, shall be the supreme 
Law of the Land; and the Judges in every State shall be bound thereby, 
any Thing in the Constitution or Laws of any State to the Contrary 
notwithstanding. 

The Senators and Representatives before mentioned, and the Mem- 
bers of the several State Legislatures, and all executive and judicial 
Officers, both of the United States and of the several States, shall be 



CONSTITUTION OF THE UNITED STATES 30 1 

bound by Oath or Affirmation, to support th is Constitution ; but no 
religious Test shall ever be required as a Qualification to any Office or 
public Trust under the United States. 



ARTICLE. VII. 

The Ratification of the Conventions of nine States, shall be sufficient 
for the Establishment of this Constitution between the States so ratify- 
ing the Same. 

THE AMENDMENTS. 



Congress shall make no law respecting an establishment of religion, 
or prohibiting the free exercise thereof ; or abridging the freedom of 
speech, or of the press ; or the right of the people peaceably to 
assemble, and to petition the Government for a redress of grievances. 



A well regulated Militia, being necessary to the security of a free 
State, the right of the people to keep and bear Arms, shall not be 
infringed. 

ill. 

No Soldier shall, in time of peace be quartered in any house, with- 
out the consent of the Owner, nor in time of war, but in a manner to 
be prescribed by law. 

IV. 

The right of the people to be secure in their persons, houses, papers, 

and effects, against unreasonable searches and seizures, shall not be 
violated, and no Warrants shall issue, but upon probable cause, sup- 
ported by Oath or affirmation, and particularly describing the place to 
be searched, and the persons or things to be seized. 



v. 

No person shall be held to answer for a capital, or otherwise infa- 
mous crime, unless on a presentment or indictment of a Grand Jury, 
except in cases arising in the land or naval forces, or in the Militia, 
when in actual service in time of War or public danger; nor shall any 
person be subject for the same offence to be twice put in jeopardy of 



302 CONSTITUTION OF THE UNITED STATES 

life or limb ; nor shall be compelled in any Criminal Case to be witness 
against himself, nor be deprived of life, liberty, or property, without 
due process of law ; nor shall private property be taken for public use, 
without just compensation. 

VI. 

In all criminal prosecutions, the accused shall enjoy the right to a 
speedy and public trial, by an impartial jury of the State and district 
wherein the crime shall have been committed, which district shall have 
been previously ascertained by law, and to be informed of the nature 
and cause of the accusation ; to be confronted with the witnesses 
against him ; to have compulsory process for obtaining Witnesses in 
his favor, and to have the Assistance of Counsel for his defence. 

VII. 

In suits at common law, where the value in controversy shall exceed 
twenty dollars, the right of trial by jury shall be preserved, and no fact 
tried by a jury shall be otherwise re-examined in any Court of the 
United States, than according to the rules of the common law. 

VIII. 

Excessive bail shall not be required, nor excessive fines imposed, 
nor cruel and unusual punishments inflicted. 

IX. 

The enumeration in the Constitution, of certain rights, shall not be 
construed to deny or disparage others retained by the people. 



The powers not delegated to the United States by the Constitution, 
nor prohibited by it to the States, are reserved to the States respec- 
tively, or to the people. 

XI. 

Tiie Judicial power of the United States shall not be construed to 
extend to any suit in law or equity, commenced or prosecuted against 
one of the United States by Citizens of another State, or by Citizens or 
Subjects of any Foreign State. 

XII. 

The Electors shall meet in their respective states, and vote by ballot 
for President and Vice President, one of whom, at least, shall not be 
an inhabitant of the same state with themselves ; they shall name in 
their ballots the person voted for as President, and in distinct ballots 



CONSTITUTION OF THE UNITED STATES 303 

the person voted for as Vice-President, and they shall make distinct 
lists of all persons voted for as President, and of all persons voted for 
as Vice-President, and of the number of votes for each, which lists 
they shall sign and certify, and transmit sealed to the seat of the 
government of the United States, directed to the President of the 
Senate; — The President of the Senate shall, in the presence of 
the Senate and House of Representatives, open all the certificates 
and the votes shall then be counted ; — The person having the greatest 
number of votes for President, shall be the President, if such number 
be a majority of the whole number of Electors appointed ; and if no 
person have such majority, then from the persons having the highest 
numbers not exceeding three on the list of those voted for as President, 
the House of Representatives shall choose immediately, by ballot, the 
President. But in choosing the President, the votes shall be taken by 
states, the representation from each state having one vote ; a quorum 
for this purpose shall consist of a member or members from two-thirds 
of the states, and a majority of all the states shall be necessary to a 
choice. And if the House of Representatives shall not choose a Presi- 
dent whenever the right of choice shall devolve upon them, before the 
fourth day of March next following, then the Vice-President shall act 
as President, as in the case of the death or other constitutional dis- 
ability of the President. The person having the greatest number of 
votes as Vice-President, shall be the Vice-President, if such number be 
a majority of the whole number of Electors appointed, and if no person 
have a majority, then from the two highest numbers on the list, the 
Senate shall choose the Vice-President ; a quorum for the purpose 
shall consist of two-thirds of the whole number of Senators, and a 
majority of the whole number shall be necessary to a choice. But no 
person constitutionally ineligible to the office of President shall be 
eligible to that of Vice-President of the United States. 



XIII. 

Section i. Neither slavery nor involuntary servitude, except as a 
ounishment for crime whereof the party shall have been duly con- 
victed, shall exist within the United States, or any place subject to 
their jurisdiction. 

Section 2. Congress shall have power to enforce this article by 
appropriate legislation. 

XIV. 

Section i. All persons born or naturalized in the United States, 
and subject to the jurisdiction thereof, are citizens of the United States 
and of the State wherein they reside. No State shall make or enforce 



304 CONSTITUTION OF THE UNITED STATES 

any law which shall abridge the privileges or immunities of citizens 
of the United States : nor shall any State deprive any person of life, 
liberty, or property, without due process of law ; nor deny to any 
person within its jurisdiction the equal protection of the laws. 

Section 2. Representatives shall be apportioned among the several 
States according to their respective numbers, counting the whole num- 
ber of persons in each State, excluding Indians not taxed. But when 
the right to vote at any election for the choice of electors for President 
and Vice-President of the United States, Representatives in Congress, 
the Executive and Judicial officers of a State, or the members of the 
Legislature thereof, is denied to any of the male inhabitants of such 
State, being twenty-one years of age, and citizens of the United States, 
or in any way abridged, except for participation in rebellion, or other 
crime, the basis of representation therein shall be reduced in the pro- 
portion which the number of such male citizens shall bear to the whole 
number of male citizens twenty-one years of age in such State. 

Section 3. No person shall be a Senator or Representative in 
Congress, or elector of President and Vice President, or hold any office, 
civil or military, under the United States, or under any State, who, 
having previously taken an oath, as a member of Congress, or as an 
officer of the United States, or as a member of any State legislature, or 
as an executive or judicial officer of any State, to support the Constitu- 
tion of the United States, shall have engaged in insurrection or rebellion 
against the same, or given aid or comfort to the enemies thereof. But 
Congress may by a vote of two-thirds of each House, remove such 
disability. 

Section 4. The validity of the public debt of the United States, 
authorized by law, including debts incurred for payment of pensions 
and bounties for services in suppressing insurrection or rebellion, shall 
not be questioned. But neither the United States nor any State shall 
assume or pay any debt or obligation incurred in aid of insurrection or 
rebellion against the United States, or any claim for the loss or emanci- 
pation of any slave; but all such debts, obligations and claims shall be 
held illegal and void. 

Section 5. The Congress shall have power to enforce, by appro- 
priate legislation, the provisions of this article. 



XV. 

Section i. The right of citizens of the United States to vote shall 
not be denied or abridged by the United States or by any State on 
account of race, color, or previous condition of servitude. 

Section 2. The Congress shall have power to enforce this article 
by appropriate legislation. 



CONSTITUTION OF THE UNITED STATES 305 



XVI. 

The Congress shall have power to lay and collect taxes on incomes, 
from whatever source derived, without apportionment among the 
several States, and without regard to any census or enumeration. 

XVII. 

The Senate of the United States shall be composed of two Senators 
from each State, elected by the people thereof, for six years ; and each 
Senator shall have one vote. The electors in each State shall have the 
qualifications requisite for electors of the most numerous branch of the 
State legislatures, 

When vacancies happen in the representation of any State in the 
Senate, the executive authority of each State shall issue writs of elec- 
tion to fill such vacancies : Provided that the legislature of any State 
may empower the executive thereof to make temporary appointments 
until the people fill the vacancies by election as the legislature may 
direct. 

This amendment shall not be so construed as to affect the election 
or term of any Senator chosen before it becomes valid as part of the 
Constitution. 

XVIII. 

Section i. After one year from the ratification of this article the 
manufacture, sale or transportation of intoxicating liquors within, the 
importation thereof into, or the exportation thereof from the United 
States and all Territories subject to the jurisdiction thereof for bever- 
age purposes are hereby prohibited. 

Sec. 2. The Congress and the several States shall have concur- 
rent power to enforce this article by appropriate legislation. 

Sec. 3. This article shall be inoperative unless it shall have been 
ratified as an amendment to the Constitution by the Legislatures 
of the several States, as provided in the Constitution, within seven 
years from the date of the submission hereof to the States by the 
Congress. 



INDEX 



Acceptance 

essential to contract, 41 

when not communicated, 44 

in terms of offer, 46 

communication of, 46, 47 

validity of, 50 

as affected by fraud, 51 

as affected by duress, 55 

as affected by undue influence, 56 

of goods sold, 153 

of negotiable paper, 199 
Accommodation paper, 198 
Adequacy of consideration, 60 
Administrative boards, 24 
Administrative law, 7 
Administrators 

contracts by, 76 

denned, 289 
Age, see "Minors" 
Agent 

defined, 99 

differs from servant, 100 

kinds of, 102 

who may be, 103 

authority of, 105-111 

ratification of acts by, 11 2-1 13 

undisclosed, 113 

torts by, 115-121 

liability of, n 9-1 21 

good faith by, 123 

terminates authority when, 126 
Agreements, see "Contracts" 
Apparent authority, see "Authority" 
Articles of confederation, 1 1 
Articles of partnership, 222 
Assignment of contract, 87-89 
Authority ojE agent 

nature of, 105 

apparent, 106 

implied, 106 

to sell, 108 

to collect, 109 



Authority of agent — Continued 

to warrant, 109 

to buy, no 

to sell on credit, no 

to borrow money, no 

as to negotiable paper, in 
Avoidance of contract 

by minor, 35 

on account of fraud, 52 

on account of duress, 55 

on account of influence, 57 

B 

Bailments, 

defined, 130 
Bankruptcy, 95 
Bearer paper, 173 
Bills of exchange 

defined, 162 

in sets, 163 

parties to, 163 

forms of, 163 
Bills of lading, 147-165 
Breach of contract, 94 
Bulk sales acts, 151 

Business associations, see "Partner- 
ships," "Corporations" 



Capital 

of partnership, 223 
Chattel mortgages 

defined, 151 
Checks 

defined, 164 
Classification of law, 6 
Codes 

defined, 17 
Commercial law 

study of, 27, 28, 29 
Commercial paper, see "Negotiable 

Paper" 
Composition with creditors, 65 



307 



3 o8 



INDEX 



Conditional sales, 131 


Demand negotiable paper, 172 


Confession of judgment, 174 


Descent, rules of, 287 


Consideration 


Discharge of contracts 


defined, 59 


defined, 91 


adequacy of, 60 


examples of, 91-97 


examples of, 61-66 


of negotiable paper, 212 


in negotiable paper, 169 


Documents of title, 147 


Constitution 


Dower defined, 274 


adoption of, 12 


Duress 


dual system under, 12 


defined, 55 


enumeration of powers by, 13 


kinds of, 55 


implied powers of, 13 




powers of states under, 14 


E 


state, 14 
Constitutional law, see "Constitution" 

defined, 7 
Contracts 

importance of law of, 31 

defined, 32 

elements in, 32 

kinds of, 33 

parties to, 34 


Endorsement, see "Indorsement" 
Estates, see "Property" 
Evidence 

parol, 84 
Executors 

contracts by, 78 

defined, 285 
Executory contract 

defined, 33 
Executory devise, 272 
Executory promise 

as consideration, 62 


offer and acceptance in, 41 
Corporations 

described and defined, 241 


powers of, 242, 253 




charter of, 242, 248 


Y 


purposes of, 243 




kinds of, 244 


Federal Reserve Board, 25 


foreign, 245 


Federal Trade Commission, 25 


stock and stockholders, 249, 258 


Formalities, see "Statute of Frauds"; 


directors of, 250 


"Seal"; "Negotiable paper" 


officers of, 251 


Formation of contract, see "Parties"; 


Courts 


"Offer"; "Acceptance"; "Con- 


functions of, 22 


sideration " ; " Legality ' ' ; 


trial, 22 


"Fraud"; "Mistake"; "Du- 


of review, 22 


ress " ; " Undue influence ' ' 


federal, 23 


Fraud 


reports of, 23 


prevents contract when, 50 


Criminal law 


avoids contract when, 52 


defined, 7 


what constitutes, 52 


Curtesy 


silence as, 53 


defined, 275 


results of, 55 


Customs 


retention of possession as, 150 


force of, 19 


as defense under law of negotiable 




paper, 187, 190 


D 


Frauds 


Debt 


statute of, see "Statute of Frauds" 


payment of, as consideration, 63 




Deeds 


G 


defined, 284 


Gifts 


kinds of, 285 


defined, 131 



INDEX 



309 



Government 
defined, 1 

Grace 
days of, 203 



Holder in due course 
defined, 182 
who is, 183 
must give value, 184 
must have good faith, 185 
must take before overdue, 185 
purchaser from, 185 
rights of, 186-193 



Illegal contracts 

defined, 68 

illustrations, 68-72 
Implied contracts, 75 
Impossibility of performance, 93 
Incomplete offers, 43 
Indorsement, see also "Indorsers" 

manner of, 179 

kinds of, 179 

necessity of, 183 
Indorsers, see also "Indorsement" 

rights of, 195 

procedure to charge, 202 
Industrial boards, 25 
Infants, see "Minors" 
Injuries of servant, 124 
Innocent purchaser, see "Holder 
due course " ; " Ownership " 
Insane persons 

power to contract, 38 
International law 

defined, 3 

express when, 3 

tacit when, 3 
Interstate Commerce Commission 

described, 24 



Joint partnership 

defined, 221 
Judgment notes, 174 



Kindness 
acts of, not contractual, 42 



Land, see "Property 
Landlord and tenant, 277, 279 
Law 

defined, 1 

municipal, 2 

international, 3 

character of, 4 

constitutional, 7 

administrative, 7 

criminal, 7 

of torts, 8 

of contracts, 9 

of property, 9 

of persons, 9 

of delegation, 9 

of business associations, 9 

of pleading and procedure, 9 

sources of, 16 

written, 17 

uniform, 18 

unwritten, 19 

study of, 27, 28, 29 
Legal obligation 

as consideration, 62 
Limitations 

discharge by, 96 
Loss, risk of, in sales, 145 



M 

Mail 

contracts by, 47 
Married women 

power to contract, 39 
Minors 

defined, 34 

power to contract, 35 

avoidance by, 35 

ratification by, 36 

liable for necessaries, 37 
Mistake 

prevents contract when, 51 
Monopolies 

defined, 70 
Mortgages 

of personal property, 131 

of real property, 281-283 
Municipal law 

defined, 2 

character of, 4 



3io 



INDEX 



Municipal law — Continued 
development of, 4 
branches of, 6 ff. 

N 
Nation 

denned, 1 
Necessaries 

liability of minor for, 37 

defined, 37 
Negotiable paper, see also "Bills of Ex- 
change " ; " Promissory notes " ; 
"Checks" 

defined, 158 

kinds of, 160-165 

requisites of, 167-175 

negotiation of, 178-181 
Notice of Dishonor 

rules governing, 206 



Offer 

see also "Acceptance" 

essential in contract, 41 

does not exist when, 42, 43 

not communicated, 44 

duration of, 44, 45 

withdrawal of, 44, 45 

refusal of, 45 
Opinion 

not fraud, 52 
Oral contracts 

good when, 46 
Ownership, see also "Title" 

defined, 130 

rights of third persons as to, 150 



Parol evidence rule, 84 
Parties to contracts, 34 
Partners, see also "Partnerships" 

kinds of, 221 

nature of interest, 224 

mutual rights of, 226 

and third persons, 219-229 

authority of, 229 

liability of, 229-234 

creditors of, 235 
Partnerships, see also "Partners" 

described, 215-218 

as to third persons, 219 



Partnerships — Continued 

kinds of, 220 

articles of, 222 

name of, 223 

capital of, 223 

property of, 224 

credits of, 235 

dissolution of, 238 
Payment as consideration, 65 
Performance of contracts 

described, 91 

tender of, 92 

impossibility of, 93 

substantial, 93 
Persons 

law of, 9 
Pleading 

law of, 9 
Possession 

defined, 130 

as fraud, 150 
Principal, see "Agent" 
Probate, 289 
Promissory note 

defined, 160 

forms of, 160 

parties to, 161 
Property, see also "Title"; "Sales" 

law of, 9 

defined, 264 

kinds of, 264 

estates in, 269-280 

mortgages of, 281 

transfer of, 284 
Protest, 209 

R 

Ratification of agency 

defined, 112 

elements, n 2-1 13 
Ratification of contract 

by minor, 36 

in cases of fraud, etc., 52-57 
Real estate, see also "Property" 

sales of, in writing, 80 
Remainders defined, 271 
Remedies 

in sales, 104 
Reports, judicial 

defined, 20 

described, 23 
Requisites of negotiable paper, 167-175 



INDEX 



311 



Restraint of trade 

good when, 69 
Reversions 

denned, 272 
Revocation of agent's authority, 126, 
127 



Sales of goods 

denned, 129 

distinguished from bailments, 130 

distinguished from gifts, 131 

formalities required, 132 

warranties in, 135 

transfer of title in, 142 

acceptance in, 153 

remedies in, 154, 156 
Seal, 83 
Servant 

denned, 99, 100 
Signature, 82 

in negotiable paper, 168 
Silence 

is fraud when, 53 
Sources of law, 16 
Sovereignty 

defined, 1, 2 
State 

defined, 1, 2 

exists by law, 2 
Statute of frauds 

history of, 77 

contracts covered by, 78, 132 

what satisfies, 82 
Statute of limitations, g6 
Sunday contracts, 72 



Telegraph 

contracts by, 47 
Tender of performance 

when sufficient, 92 
Termination of agency, 126-127 
Title, defined, 130 

transfer of, see "Transfer of Title" 

rights of third persons, see "Owner- 
ship" 
Torts 

law of, 8 

examples of, 9 

by agent, 115 



Trade 

contracts in restraint of, 69 

transfer of contract, 87 
Transfer of negotiable paper, see "In- 
dorsement"; "Holder in due 
course" 
Transfer of title 

cannot be made when, 142 

intention of parties as to, 142 

rules governing, 143-145 

by documents, 147 

see also "Ownership" 
Trusts defined, 273 

U 

Undisclosed agency, 113 
Undue influence 

uniform laws, 18 

effect upon contract, 57 

uniform negotiable instruments act, 
131 

uniform partnership act, 215 
Uniform sales act, 131 
Usury 

unwritten law, 19 

denned, 72 



Value 
defined, 1! 



W 



Warranties 
defined, 135 

opinions and predictions not, 136 
express, 

defined, 136 
oral, 137 

excludes implied, 137 
implied, 
of title, 137 
of quality, 137 
in sale by description, 138 
in sale by sample, 139 
of merchantability, 140 
of fitness for purpose, 140 
Wills, 288 
Writing 

in negotiable paper, 167 
Written contracts 

see "Statute of Frauds" 
Written law, 16, 17, 18, 20 



Printed in the United States of America. 



l HE following pages contain advertisements of a 
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MACMILLAN'S COMMERCIAL SERIES 
Edited by CHEESMAN A. HERRICK 

President of Girard College, formerly Director of School of Commerce 
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